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What does it mean to be an “Additional Insured?”

The answer lies in the details of the underlying contract and the details of the underlying insurance policy. Today more and more companies are focusing on risk transfer mechanisms within the contracts they have with their vendors, suppliers, contractors and sub-contractors. Sometimes this comes in the form of an indemnification provision and sometimes it comes in the form of an insurance requirement, with most contracts between sophisticated parties including both an indemnification provision and an insurance requirement. The insurance requirement will typically be comprised of two components, a requirement to maintain a certain level of insurance and a requirement to list the contracting party as an additional insured. Many companies are under the impression that if their contracts require that they be named an additional insured on the other party’s insurance policy, they will be fully protected from liability. Often it is assumed that these protections will avail themselves to the same extent as the indemnification provision in the contract, but being named as an additional insured does not necessarily provide such protection.

The fact that a contract contains both an indemnification clause and an additional insured clause does not necessarily mean that the two will complement each other and that the insurance will cover the indemnification obligation. An additional insured is only insured to the extent of the underlying insurance policy which will often contain limitations and exclusions that may not fully encompass such indemnification obligations. This creates the risk that a company is offering more abundant indemnification than its insurance is prepared to cover.

When an indemnifying event occurs, a company could find itself on the hook for costs and expenses of the other party that do not fall within the purview of the insurance policy, leaving the company to pay such costs and expenses out of its pocket. Such instances can be avoided by careful contract drafting that ties one provision to another (agree to indemnify to the extent of the insurance coverage) and by a thorough review of the underlying insurance policy to see if any gaps or exclusions exist. This means more than just ensuring that your company’s name appears on the declarations page or the policy binder. It means reviewing endorsements, exclusions, and exemptions and doing so on an ongoing basis to keep up with the moving target that is the ever-evolving world of risk transfer in commercial insurance.

There is no one-size-fits-all approach to addressing indemnification and insurance issues within a contract. Not only do insurance policies vary from company to company, but risk transfer laws vary from jurisdiction to jurisdiction and risk factors vary based on the nature of the goods or services being provided. For companies that perform multiple services such as design, installation, startup, maintenance, etc., form language that requires being named an additional insured will almost always fail to fully protect the party in some way. To eliminate such failures and ensure that the appropriate protections are in place, a company should place emphasis on drafting more focused language that considers both the nature of the underlying risk and the scope of coverage in the underlying insurance policy, and should thoroughly review the underlying insurance policy to make sure it does what the contract intends for it to do.