Businesses work with other businesses on a daily basis to complete joint projects. For example, when a contractor builds a home, they use the work of sub-contractors for materials and labor for the project. These businesses sign contracts or agreements prior to any work being completed. So, how does business insurance work to protect against the risk of some other company, vendor, or sub-contractor causing damage to people or property of a mutual customer?
This is where the additional insured status comes in. One party will add the other party as an “additional insured” on their commercial liability insurance policy.
By adding an entity to your policy as an additional insured you are protecting that entity against your company’s negligence. By having another entity add your business as an additional insured that company is protecting you against their negligence. For example, general contractors often require subcontractors to name the general and the owner on the subcontractor's policies. In this way, if the general contractor or owner are sued due to accidents arising out of the work of the subcontractor, the subcontractor's insurance will protect the general contractor and owner.
Additional insured status must be added by certificate and endorsement. That means there is a formal process to follow with your insurer and you must make sure those businesses you work with who claim to have added you have actually done so. Demand to see the actual endorsement and not just “proof” of insurance.
Additional insured status DOES NOT mean the additional insured does not need insurance. It means the additional insured has controlled the risk of others’ negligence and can rely on their own business insurance policy to protect against their negligence.
Additional insured status does not give the same rights under the policy terms as a “named insured” or “insured” and these are technical distinctions that need to be reviewed with your local insurance agent.
Whenever your business enters into a project with another business or contracts with another business on an endeavor follow these four general principals.
- Never assume the other business has liability coverage and obtain a certificate of insurance to verify their insurance coverage.
- As a part of a written contract, demand a copy of the additional insured endorsement and review it with your insurance agent and legal representative.
- Understand what your additional insured coverage status covers and look at your liability policy. There may be gaps in coverage that can be easily fixed (before the relationship starts).
- Read the contract requirements and write the contract requirements carefully to make sure your business is not jeopardizing its own coverage in agreeing to add additional insureds and know what you are extending when you agree to add additional insureds. Similarly, know what you are demanding when your business asks for that status from another business on their business insurance policy.
The cost of adding an additional insured to a property or liability insurance policy is generally low, as compared to the costs of the original premium.