The words “additional insured” are contained in the insurance provisions of many general contracts and subcontracts. Generally those contracts require the contractor and/or subcontractor to add named parties to their liability insurance policy as an “additional insured.”
A party listed as the “additional insured” on a liability policy gets substantially the same insurance coverage as the principal insured party. At first glance adding an “additional insured” may seem harmless since the additional premium charged by the insurer is relatively inexpensive. However, it can lead to consequences that become expensive.
When a subcontractor obtains a policy endorsement naming
another party as an “additional insured,” it must realize that it may result in
liability greater than the extent of any harm that the subcontractor may cause
on a construction project.
Adding an “additional insured” carries other consequences. Any claim made relating to an “additional insured” is charged against the subcontractor’s policy limits, thereby reducing the total amount of available coverage on future projects. Also, the subcontractor has to pay the policy deductible and may not have any right to recover that sum from the “additional insured.” Also, a claim made on a subcontractor’s policy resulting from an act or omission of an “additional insured” will usually lead to higher future premiums on the subcontractor’s liability insurance and a diminished insurance experience rating. And, any party named as an “additional insured” by the subcontractor may obtain rights greater than the rights that party has under the indemnity clause in the contract documents.
The party named as the “additional insured” should understand the relationship between its own insurance policy and the policy on which it is named as an “additional insured.” It must consider potential gaps in coverage that may arise if, for instance, the other party fails to renew that policy or is exposed to claims that exhaust its aggregate limits and/or that policy is involuntarily cancelled.
In addition, the party named as the “additional insured” should realize that there are many technical insurance questions raised by the relationship including whether its own insurance policy and the policy on which it is named as “additional insured” are both primary insurance for a claim, or one policy acts only as an excess policy. Another concern is whether its own general liability policy provides coverage for claims made after work is complete (so called “completed operations”), since endorsements adding “additional insured” typically limit coverage only to claims made during the time the work is actually performed.
Insurance on construction projects is complicated. You should always use your insurance agent as your prime resource for information relating to liability coverage and the implications of any endorsement to a liability policy.
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