I Got You Covered: Part II – Benefits and Downsides of Additional Insured Status

In this installment of “I Got You Covered,” we discuss the benefits and drawbacks of additional insured status.

Benefits of Additional Insured Status

There are a number of reasons why a company would seek additional insured coverage.  These include the following:

• Accessing Someone Else’s Insurance.  At the heart of additional insured protection is the luxury of accessing someone else’s insurance.  Not only do additional insureds sidestep the procurement process, but they also avoid paying premiums and defense costs as well as disclosing their own loss history, which could ultimately increase premiums.
• Backing Up a Promise of Indemnification.  When companies do business with one another they often enter into contracts that contain indemnity agreements, whereby the indemnitor assumes the cost of a loss suffered by the indemnitee.  Additional insured coverage acts as reassurance to the indemnitee that it may have protection even if the indemnitor is financially unable to comply with the indemnification obligation.  Furthermore, in many states, accompanying insurance is a prerequisite to the enforceability of an indemnity agreement that indemnifies against the sole negligence of the indemnitee.
• Prohibiting an Insurer’s Subrogation Against the Additional Insured.  Under the doctrine of subrogation, an insurer that covers its policyholder’s claim assumes the rights of the insured, including any rights to recover from a negligent third party.  The anti-subrogation rule, however, prevents an insurer from asserting a right of subrogation against the policy’s insureds, including additional insureds.  As a result, an insurer that indemnifies its insured can’t turn around and seek reimbursement from the additional insured, even if the additional insured’s negligence caused the loss.

Downsides of Additional Insured Status

Although the benefits of being an additional insured normally outweigh the disadvantages, there are some drawbacks, including the following:

• Misconceptions about Available Coverage.  Additional insureds are understandably concerned with their named insured’s policy limits, but this doesn’t always give an accurate picture of the scope of coverage that’s actually available.  Factors such as other additional insureds and prior claims can affect an additional insured’s benefits in that there are either more insureds going after the same pot of money, or else the pot of money is diluted from the beginning by payment of pre-existing claims.  To understand the true scope of coverage, an additional insured should solicit answers to questions about the amount of available coverage, exhaustion of limits (if any), whether the limits are shared with the named insured and/or other additional insureds, whether there are deductible or self-insured retention requirements, and whether defense costs erode limits from the named insured.
• Conflicting Defense Positions.  An additional insured’s best defense may not be the named insured’s best defense, especially if the parties are blaming each other for the loss.  In such cases, the insurer may have to hire separate defense counsel for each insured that has a dispute.  Although the additional insured should not have to pay for its defense costs, the costs may erode the policy limits and leave less money for indemnification.

Conclusion

As seen above, there are downsides to being an additional insured, but these typically are outweighed by the benefits.  In the final installment of “I Got You Covered,” we provide various risk management tips that apply to additional insured protection and hope to leave you with enough information to decide whether your company should seek such status.