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An insurance policy rarely meets every contractor’s needs out of the box. Fortunately, endorsements offer one way to customize coverage. One of the most common endorsements you’ll likely encounter involves additional insured (AI) parties. In short, an additional insured is typically another business entity or person who can be added to your business policy, securing the same liability protection that you do. While it may sound unusual, adding additional insureds is common and extends benefits both to you as a policyholder – and the party being named on the policy. In this article, we’ll explain additional insured endorsements, and how they work in construction.
Further reading: 9 Common Types of Construction Insurance Policies
What is an additional insured?
An additional insured agreement allows a policyholder to extend their business insurance coverage to a specific third party. Subcontractors, for instance, will benefit from some of the same coverages a general contractor realizes. However, under most circumstances a third party’s coverage will be more limited for an AI than it will be for the GC or policyholder.
Additional insured endorsements have recently drawn more attention in the construction industry. Among a number of other issues, insurance risk shifting is a concern for carriers. The goal of an AI, therefore, is to specifically answer the question, “Who is insured by the policy?”
A construction business has many business relationships: vendors, suppliers, and subcontractors, etc. – all of which operate differently. These parties may have an interest in a project you’re taking on, so an additional insured endorsement helps get everyone on the same page with respect to insurance coverage.
There is typically no cost to name an additional insured, but some insurance companies may charge a nominal fee to amend the existing policy.
Additional insured, policyholder, certificate holder: What’s the difference?
There are several related terms that are commonly confused in insurance policies and construction contracts. Here’s a quick overview:
- A policyholder is the entity that purchases the business insurance policy. Also referred to as a named insured, all policy coverages, exclusions, and conditions generally apply to the policyholder. The policyholder will also have certain duties to perform if an insurance claim is incurred and reported.
- An additional insured is a separate party that may be added to another party’s business insurance policy. The AI benefits from some or all of the liability coverage extended to the policyholder. AI endorsements are often required as part of the construction contract.
- A certificate holder is a party that requires proof that a contractor meets the insurance requirements to perform work as defined in the contract. A certificate of insurance can be obtained through an insurance agent or broker and is then submitted to the party that requested the proof of insurance.
- An additional interest is a party that has a financial interest in the project being insured, but doesn’t need coverage extended to them. This may include a lender or financial institution. They are notified about the policy when changes are made. It’s also called a “party of interest” or “interested party.”
When to use additional insured endorsements
As the policyholder, you can add an additional insured for any purpose necessary. However, most of the time project owners want some additional protections by being named as an AI. On the other hand, a general contractor may hire a plumber and ask to be named as additional insured on their liability policy.
The most common way to identify when a party needs to be added as an additional insured is to review all contracts with third parties and check the sections detailing insurance requirements. Typically, the need to obtain status as an additional insured will be included along with other specifications of each insurance coverage.
A general best practice is typically that any subcontractor working on behalf of a contractor should also name the contractor as an additional insured in their liability policies. In addition, any other additional insured needs should be viewed as part of the company’s risk transfer program.
Since most all stakeholders carry business insurance, you might wonder what an additional insured is meant to accomplish? As a contractor, you probably can think of many things that could go wrong on a job. Though not common, large and complex claims do occur.
Additional insured endorsements mean more insurance coverage for contractors, owners, or investors — and that security helps everyone involved do their jobs with peace of mind. As a contractor, you can get protection from an additional insured endorsement on a subcontractor’s policy if the sub’s actions contribute to an injury or accident.
What does additional insured cover?
An ordinary insurance package for a contractor contains two main components:
- Property insurance protects physical assets that you own
- Liability insurance protects you from the cost of legal action and possible jury awards from injuries or reputational harm to a third party
Additional insureds are typically added to a general liability policy, since a subcontractor doesn’t have an interest in your business property. The coverage may extend to an additional insured in part or in total. For example, an AI endorsement added to a $2 million contractor’s liability policy may only offer $1 million in coverage to a subcontractor named as additional insured.
Common additional insured endorsements for contractors
In light of the current legal environment, construction or repair contracts will require the naming of additional insureds. Broad endorsements can extend coverage to parties the carrier or policyholder had not anticipated. These endorsements call for specific language and a review of the entity being added. Also, many different kinds of AIs have been created, limiting how an entity or individual is added or what coverage is extended.
Some of the more common endorsements are as follows:
- Additional insured coverage for ongoing operations: If a plumber’s error causes water damage to structures on a worksite, the damage is considered to be part of “ongoing operations” and therefore covered under the liability coverage. The named insured would have to be found liable in some capacity in this instance.
- Additional insured’s implied liability: If we use the above example of water damage that occurs years in the future, the only difference is that the subcontractor or additional insured is found liable because of the action’s of the named insured. Under these circumstances, completed operations insurance needs to be maintained by the contractor after jobs are finished.
- Blanket additional insured endorsement: This offers additional insureds the same coverage as ongoing operations described in the first example. With a blanket endorsement, however, a general contractor or subcontractor does not need to be individually scheduled as an additional insured each time it works with the named insured.
- Blanket completed operations endorsement: This endorsement also works on a blanket basis as explained above, but claims incurred will be covered even after the project is completed.
Using a wrap-up to extend coverage
Wrap-up insurance policies, like OCIPs and CCIPs, have become a common way to extend liability coverage to everyone working on a construction project. Also simply called “wraps,” these policies can reduce or eliminate the need for additional insured endorsements.
A wrap-up is often created with “liability-only” coverage, but the policy is sometimes written to include workers compensation insurance in what is known as a “bi-line” policy. Wraps can remove uncertainty around the need to name contractors as additional insureds, since they automatically provide coverage to all contractors and subs on the project.
Your bottom line
Understanding the mechanics of additional insured endorsements will give you some confidence with contracts and negotiations. With respect to premium payments, it’s money well-spent when it comes to peace of mind. On a grander scale, knowing how and when to extend liability coverage to additional parties can help preserve your bottom line.