Additional Insureds – when, why, and should we?

This article on “Additional Insureds” for commercial insurance policies was written by Geoff Gordon of Andrew G. Gordon Insurance Agency.
Generally speaking, it’s good to have others name YOU as an “Additional Insured” (AI) on their policy, but bad for you to name others on yours. (But not always — this article explores both sides). The main point is that when you name someone an additional insured on your policy, you are sharing your insurance with them; when they name you, you’re piggybacking on their insurance.
For example, Ed Electrician (sub-contractor), wants to do electrical work for Bill Builder (general contractor). Bill Builder requires Ed to name him as an Additional Insured on Ed’s General Liability policy; to get the work, he agrees. After the project is completed, a fire destroys the building, and the Fire Marshall determines the fire was caused by Ed’s work. The owner’s insurance company pays the fire loss, then goes after Bill to recover the money. Bill, as an additional insured on Ed’s policy, gets his defense and losses paid from Ed’s insurance, never touching his own. The problem arises for Ed if defending both exhausts the insurance.
Why you would ask someone else to name YOU as an Additional Insured:

  • Prohibits their insurer from subrogating against you (common law prohibits one “insured” from suing another “insured”).
  • Receive direct policy rights with respect to defense coverage.
  • Acts as a safety net if the hold-harmless agreement becomes unenforceable.
  • Provides vicarious liability defense—for actions of the policyholder, and direct liability defense for your actions.
  • Provides higher total limits (you still have yours)
  • Reduced insurance costs today (best insurance costs available when you require sub-contractors to name you an “additional insured”.

Reasons NOT to be named as Additional Insured:

  • Loss off defense control (it’s the other guy’s insurance); and dependency on others.
  • “Other insurance” conflicts may arise between your policy and theirs.
  • Increased possibility of disputes over coverage.

Your reasons to name others as Additional Insured:

  • Close relationship with the AI: all members of an insured club,
    church, or charitable group, or unit-owners of a Condo association
  • Business relationship, especially common with
    – Project owners, on policies of general contractors;
    – General contractors on policies of sub-contractors;
    – Owners or lessors of real estate on policies of tenants;
    – Vendors named on the policies of manufacturers.

Your reasons to avoid naming others as Additional Insureds on YOUR policy:

  • Dilution of your policy limits—you’re sharing your insurance with some one else.
  • Unintended coverage provided to someone you might not be getting along with.

Hold Harmless agreement: Where one party (or both parties) agree that if something goes wrong, you agree not to go after them. A sub-contractor may be required to hold the General Contractor harmless, meaning that if the GC makes a mistake resulting in damages to the sub, the sub won’t seek damages.
Indemnification agreement: where one part agrees to indemnify, or compensate, for damages that arise from the actions of another. A sub-contractor is asked to “indemnify” – the general, meaning if the sub does anything that results in action against the general, the sub will pay.