Tuesday Morning Insurance Tidbit - Named Insured vs. Additional Insured

[InsuranceMan]

G O O D               M O R N I N G                  A D I ! ! ! ! ! ! ! ! !

 

     In today’s instalment of the “Tidbit”, we are going to cover the differences between “Named Insureds” and “Additional Insureds”.  Sounds amazingly wonderful, doesn’t it?!?!??!?  Ok, no, it does not really sound that interesting, but it is something that people have a hard time understanding, and I do get a lot of questions about it, thus making it the “topic du jour”.

     Let us begin with Named Insureds.  What is a Named Insured?  Well, in a quick synopsis, a Named Insured is the individual or company listed within the Declarations of the policy.  Named Insureds are the people or the entity that the policy is written for.  In fact, in the policy language it will define the Named Insured to mean you and your, meaning that the coverage is specified to cover the entity or those encompassed under the entity.  Officers of the entity are covered without being named individually or specifically, as are employees acting on behalf of the entity, but only while engaged in conducting business on behalf of the entity.  Heck, even volunteers can be covered while acting on behalf of the entity! 

     Being a named insured offers the broadest level of coverage provided by an insurance policy.  Sounds nice, right?!?!?!  Being a Named Insured gives you the broadest coverage, which is a great thing to have … but there is more.  It also comes with some duties and responsibilities.  Hey, if you are the Named Insured and you are getting the broadest coverage, you are going to have some obligations as well, right?!?!?!  Ain’t nothin’ free!

     So, what are some of your responsibilities as King Of The Insurance Policy?  Well, for starters, the policy is going to specify that it is your duty to report any claims, or potential claims to the carrier.  Usually this is done via your insurance agent, but in many cases,  you can provide the claim directly to the insurance company, if you so choose.  I would encourage you to at least loop in your agent though, so that they are not blindsided by a claim, especially if it is something fairly significant.  As well, your agent can assist you in getting the claim handled in the best way possible, stay on top of updates, and be your advocate to the carrier.  Another duty of the Named Insured is to keep all of the pertinent records and other necessary information that the carrier may need in order to properly rate premiums, handle audits, and in most cases and most importantly, pay the bills.  Oh, it also allows you the ability to change the policy at any time or cancel it, no one else has that ability.  OH THE POWER!!!!!!!!

     “Can there be more than one Named Insured?”, you may be asking.  I was just pondering the same thing!  Weird, its like we are insurance best-ies.  Like, we totally finish each other’s insurance thoughts.  So cool!!!   As it turns out, yes, there can be.  There are actually several instances where you may have common ownership in several different entities and due to the nature of the ownership, they can all be listed on one policy.  Let’s say you have your distillery under one entity name, but you own the building in the name of another entity (with common ownership) but lease it back to the first entity, and you have a distribution entity as well.  All of these entities can be insured under one policy as Named Insureds!  Man, this is so great, right?  All of this insurance knowledge in one place, who knew?!!?!?!  Well, just hold on one hot second here before you get to excited and call all of your friends to bestow upon them all of this great information.  As with most things in life and for sure most things “insurance”, there is a catch.  Although you CAN list multiple Named Insureds on your policy, the big question becomes SHOULD you?

     Why would you not want to list every entity on one policy, wouldn’t it make it easier for everyone?  One premium to pay, one policy that has all the information on it, one “go-to” for all your needs?  Yes, that sounds like a great idea, dear reader.  However, one of the biggest reasons why you may not want all of the entities listed as Named Insureds is due to the fact that the policy limits do not increase exponentially based on the number of Named Insureds.  What I mean is, just because you have three Named Insureds, that does not mean that each one of them is afforded their own $1,000,000 worth of coverage in the case of a claim.  By naming all three entities in the example above, it does not make your $1,000,000 occurrence policy into a $3,000,000 policy.  Quite the opposite in fact.  What ultimately ends up happening in a claims situation that can legitimately name each entity, is a sharing of that $1,000,000 limit.  If there were a situation that arose that named the distillery entity, the building entity, and the distribution entity, then effectively each would only have about $333,333.33 worth of coverage available to them under this policy.  (Please keep in mind, this is a very simplistic illustrative example.  Depending on the claim, amounts, percentage of damages, etc., more coverage could be available to one entity over another, but the fact remains that there is only one amount of available limit across all Named Insureds).  That alone is a pretty big reason as to why you may not want to have multiple Named Insureds on a policy.  Then there is the hotly contested “First Named Insured” debate.  Does the First Named Insured have first right of coverage over any other Named Insureds, and if so, which entity should be named first and how then do you determine the order of the rest of the Named Insureds.  Furthermore, you don’t even want to get me started on the possible tax implications, severability issues, cross-suits, etc. 

     What this really means is, at the end of the day, it may be best to have each entity procure its own policy that is solely responsible to only one Named Insured.  This then provides the entirety of the specified limit to only the one Named Insured listed and keeps you from having to worry about a suit that can name each individual entity, since they each would be covered on their own.  Of course, if you are still desiring one policy naming all of your entities, the issue of splitting limits can possibly be overcome by the addition of an excess or umbrella policy.  A simplistic example of this would be, if you were to place an excess policy of $2,000,000 on top of your $1,000,000 policy (and name all the same Named Insureds in the correct order, make sure that it was follow-form, among many other very specific parameters), and all the stars align, then you essentially would have a $3,000,000 policy giving each entity their own $1,000,000 in coverage.  Again, there are a lot of things that need to happen, and boxes checked in order to make this happen correctly.  That paired with the fact that excess policies usually cost around $1,000 per $1,000,000 of coverage, you may not be any money ahead by doing this.  Being that there really may be no cost benefit (or very little) in the excess / umbrella scenario, I would reiterate that it is probably best to have separate policies for each Named Insured.

     OK, so what is an Additional Insured then?  I am glad you asked.  An Additional Insured is someone, something, another individual or entity, that is added to the policy due to your business relationship with them.  This is usually done for a specific job or task, or for a limited time, location, or limited business function.  Most Additional Insureds are added to the policy via an endorsement due to the nature of their relationship with the Named Insured.  An example that I have dealt with on many occasions is in regards to distributors or suppliers.  Let’s say that you have the opportunity to sell your product in a “big box store” that means a lot more revenue for you (yes, I know, selling to big box stores means having to do so for less than you would sell to other places, but just humor me here).  That big box store is going to tell you that in order for you to sell your product through them, they are going to want to see proof of liability coverage, maybe an excess policy, oh, and by the way, they also want to be listed as Additional Insured on your policy.  Or maybe it is a much smaller scale.  A local farmers market is going to host a total of 6 – once a month markets and for you to show up and sell your spirits, they want to be named as an Additional Insured.  In either situation what this means is that if your actions or your product somehow cause damage to person or property, and you are sued along with the box store/farmers market, that your policy will provide coverage on behalf of the Additional Insured.

     So, let us hypothesize that you are at the farmers market and leave a box of bottles out in the middle of where everyone is walking (silly you 😊 ), and someone trips over it and gets hurt.  They in turn decide to sue you, and name the farmers market organizers as well.  Being that you named the farmers market on your policy as Additional Insured, your policy is going to respond to the claim brought not only against you, but for the farmers market as well.  That was nice of you, to give them insurance coverage for your boneheaded move!  Again, in this situation we see a split of coverage.  Just because we have a Named Insured and an Additional Insured does not mean our overall limit increases.  It is actually used for both suits, thereby essentially reducing your overall limit.  Scary!  Again, this is why there are excess / umbrella policies available. 

     Additional Insured status is very commonplace in today's world.  Whether it is the request of a landlord, an event holder, a distributor, etc., everyone asks for this and usually gets it.  It is how business is done, and really, it is just a layer of protection for them in case you do something that causes an issue.  After all, why should they be on the hook for some goofy thing someone else does?!?!?!  With that said though, do you require Additional Insured status from your glass provider?  How about from your grains distributor?  Hummmm????  Interesting.  Have you ever thought of that?  Have you ever considered  being an Additional Insured … why would you do that?!?!?!?  For many reasons, that’s why!!!!  What if the glass provider sends you glass that is impure or has a defect causing it to break easily and harm someone????  Your product did not cause the glass to break and cut someone’s finger off, but your name sure as heck is on the label, and you can rest assured that old four-finger Joe (as he is now known) is going to pick up the phone and dial up (very carefully, as now he is healing from his lost digit) his lawyer and say he wants to sue whatever name is on the bottle.  Well, if you had your glass provider name you as Additional Insured, you could turn this claim over to them to have them handle it since your product and you did nothing wrong.  You can kick back and raise a glass knowing that you are being taken care of and the claim will never hit your loss report.  SWEET VICTORY! (except for four-finger Joe, it wasn't so great for him)

     I know there are many moving parts to all of this, and so many items of confusion as to who is what, and what applies to who, and what limit is whose, and which what is where.  Keep in mind, we didn’t even discuss primary and non-contributory, or waivers of subrogation.  When it is all said and done, you are not in the business of knowing or having to know all of this crazy boring insurance stuff.  You are in the business of making delicious distilled spirits, and bless you for doing so!!!!!!!!!  You don’t want to have to know all of this, or worry about any of it, that is why you need to allow me, InsuranceMan2.0!!! to handle all of your insurance needs.

     And with that, dear reader, your head is probably swimming and I dare say, you probably need a nap (if you didn’t get one half way through reading this).  I will leave you for this week with this thought …  Has your insurance agent ever gone into this kind of detail for you?  Could they?  The really big question is, would they????  Well, I do, I can, and I do it weekly.  Imagine if you had that kind of insurance power in your back pocket.  Well, that is what you get when you deal with me, InsuranceMan2.0!!!  Until next time, dear citizen ….

 

Stay Vigilant,

Aaron Linden

a.k.a. InsuranceMan2.0

307-752-5961

InsuranceMan2.0@yahoo.com