Considering Additional Insureds Coverage

By Cooper, S. Michael | Risk Management, February 2005 | Go to article overview
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Considering Additional Insureds Coverage


Cooper, S. Michael, Risk Management


There are two forms of contractual risk allocation--contractual indemnity and additional insured coverage. Ideally, the company seeking to transfer the risk wants both provisions in the contract. The idea is that if the indemnity agreement is unenforceable for some reason, the indemnitee has a chance for recovery as an additional insured. Likewise, if insurance is not applicable, the indemnitee can look to the hold harmless agreement.

In many cases, however, the party seeking to transfer the risk only focuses on the indemnity agreement. The additional insured provision is forgotten or ignored. Indemnity agreements have been the traditional workhorse in the world of contractual risk transfer for many years, so some risk managers continue to gravitate towards what they know. Others suffer under a common misconception that the indemnity provision and the additional insured provision are directly linked in some way--if the indemnity provision does not apply, the additional insured provision does not apply. And if there is uncertainty regarding the steps that need to be taken to obtain additional insured coverage, many times no steps are taken at all.

But with careful consideration of the benefits and drawbacks of the additional insured provision as a risk transfer mechanism, particularly when compared to the indemnity provision, risk managers can determine whether or not this provision is right for their organization and then begin to take the necessary steps to obtain and properly utilize this coverage.

Generally speaking, the benefits provided by the additional insured provision stem from one basic concept--the additional insured seeks protection in the form of direct rights under an insurance policy. This is in contrast to the indemnity provision, where one company seeks to have another company pay for its liability. There is a dramatic shift in attitude by the courts between Company A seeking to have Company B pay for its fault versus Company A seeking insurance coverage directly from an insurance company (even if it is Company B's insurance company). That attitude explains why additional insured coverage has the following advantages:

Broader benefits than indemnity. The traditional way of transferring risk is through indemnity provisions. But courts and legislatures are unfavorably disposed to indemnification agreements because the agreements create an unequal bargaining position and subcontractors are poorly situated to bear such unlimited risk. Indemnification agreements also provide too great a disincentive for the indemnitee to be vigilant for workplace safety. Many times, the indemnity provision must contain "magic language" in order for the indemnitee to recover. For example, unless the indemnity provision specifically states that it covers "strict liability," the indemnitee will not be covered for that risk.

With rare exception, neither legislatures nor courts are hostile to additional insured coverage. One reason may be that an insurance company--as opposed to a subcontractor--would be hard pressed to argue that it is in an unequal bargaining position with respect to anyone.

The overriding primary benefit of the additional insured provision is that, depending on the endorsement used, coverage may be provided for the additional insured's own negligence. Indeed, numerous courts have recognized that the purpose of additional insured coverage is to furnish coverage for the additional insured's own negligence. The same simply cannot be said for today's indemnity provisions, which are generally designed to make sure that one party does not pay for the other party's fault.

Anti-indemnity statutes may not apply. Many states have "anti-indemnity" statutes, which prohibit indemnification in certain circumstances. The purpose of these statutes is to protect certain contractors, namely those in oil fields, from being forced through indemnity provisions to bear risk of their principals' negligence.

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