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As a business owner, the relationship between you and your client is the most important one. However, there are times when you might have to invite a third party to join that relationship.
That’s why understanding third-party risk is a very important piece of the puzzle when putting together a good risk management plan for your business.
Say you sign a contract with a client to provide them with a product but you need the help of a third party, a manufacturer, to complete a certain aspect of your product before it can be delivered to your client.
And while you might already have all of the insurance policies you need to protect yourself from lawsuits and pay for damages if your company makes a mistake, what if the mistake is made by the third party that you have introduced into the equation?
That’s where an additional insured endorsement can help you out.
What is an Additional Insured Endorsement?
When we talk about endorsements in insurance, we are talking about addendums that are added to an insurance policy in order to change the coverage provided by the policy in some way. Endorsements can broaden a policy’s coverage, but they can also restrict it, depending on the intention of the endorsement.
An additional insured endorsement does exactly what you would expect it to do, it adds another insured party to the policy. When an additional insured endorsement is added, there is a change made to the “Who Is An Insured” section of the insurance policy, extending coverage to an additional party.
This endorsement is usually added to a pre-existing liability insurance policy. Most commonly, you’ll see businesses add additional insured parties to commercial general liability, professional liability, and commercial auto insurance policies.
Important Note: Adding an additional insured party to a policy does not mean that they will always have the same exact coverage and benefits as the named insured. It all depends on how the policy was written, meaning that if you want to add this endorsement to your policy, you do have a say in the amount of coverage that the additional insured will receive.
Naturally, including an additional insured endorsement in your policy is not free and will increase the cost of your premium, however, it’s still a much more cost-effective option than taking out a new policy to insure a third party.
Additional Insured Endorsement Example
Say you’re a construction contractor working on a particular project for a new client. However, there is an aspect of the project that you can’t handle internally, which means that you need to bring in a subcontractor to handle this job.
In such a case, it would be a good idea to add the subcontractor to your existing insurance policy as an additional insured. It’s also not uncommon for a subcontractor in this type of situation to ask you to list them as an additional insured before accepting the job.
By providing coverage for the subcontractor via an additional insured endorsement, you are protecting yourself in the case that the subcontractor makes a costly mistake that leads to a lawsuit and the subcontractor is also protected in the event that you make a mistake that leads to a lawsuit in which they are named.
Who Benefits from an Additional Insured Endorsement?
The main benefit of an additional insured endorsement is that it will reduce the impact of the policy owner’s loss history since the additional insured status serves to make sure that the financial responsibility of the claim is placed on the policy of the party that is most likely to be responsible for the claim.
This means that if a loss occurs that is a direct result of the involvement of another party, the named insured is able to make sure that the appropriate parties are going to be held responsible for the losses and keep their loss history lower in this way. This is different from the loss payee, which we cover in our guide on additional insured vs. loss payee.
How To Get an Additional Insured Endorsement
Getting an additional insured endorsement is actually pretty easy. All you need to really know is who the party is that you want to add to your policy under the endorsement and their business address.
This will be enough for most insurers since it’s uncommon that they ask for more sensitive information such as Social Security numbers. Once you know the name and address of the company or individual that you want to add to your coverage, get in contact with your insurer and make the request.
Even though you’re not taking out a new policy, the endorsement will appear as a separate document under your policy.
Important Note: If another company has agreed to include your company as an additional insured, make sure that you have a copy of the document as well. Unlike certificates of insurance, which you can request at any time, you can’t ask another business’s insurer to send you proof of your additional insured endorsement.
What Does It Cost?
The cost to add an additional insured endorsement to your policy isn’t very steep but it really all depends on your insurer. Some insurers even offer their clients a flat rate for adding as many additional insureds as they would like to their policies.
But even though it probably won’t cost more than $50 to add someone to your policy, the real cost of an additional insured endorsement is seen in the policy holder’s premium, which will undoubtedly increase with each additional insured that’s added to the policy.
How much the named insured’s premium will increase will depend on a few things, including how many additional insureds have been added to the policy and the nature of the endorsement.
In order to get a better idea of what getting an additional insured endorsement will cost you, it’s always best to have a conversation with your broker and explain the nature of your cooperation with the additional insured in order to get a better understanding of how your premium could be affected.
Here are some other things to keep an eye on in order to be certain that you are getting the protection you expect from an additional insured endorsement whether you are the one adding someone to your policy or you’re the additional insured being added to someone else’s policy:
Having the Right Form(s)
Not only is it important to know the name and address of the business that you want to add as an additional insured it’s also important to fill out the right forms.
This is something else that you should talk with your broker about if you need help because the type of form you need depends on whether the third party needs to be added for ongoing operations, completed operations, or both.
Adding the wrong endorsement to your policy could lead to a lack of coverage in the event of a claim.
Can You File a Claim as an Additional Insured?
Yes, additional insureds are able to file claims if they are sued after a risk event has occurred. The outcome of the claim will depend on the endorsement and what is covered specifically by the policy and the endorsement.
It’s important for all parties involved to clearly understand what is covered by the endorsement so that in the event of a claim, all parties involved will clearly know which party will be held responsible for what damages.
It’s a good idea to include all additional insureds in the conversation with the broker so that the insurer can go over the coverage in detail and everyone involved can ask questions in order to gain a better understanding of who is covered for what in the case that a claim occurs.
Do Additional Insureds Need Their Own Policies?
Absolutely. An additional insured endorsement can in no way be considered a substitute for having your own, stand-alone insurance policy to protect you.
Additional insured endorsements will always have limitations in coverage when compared to the coverage you would receive from a stand-alone liability policy of your own. So even if you’re listed as an additional insured on a business partner’s general liability policy, you should take out a general liability policy of your own in order to avoid potential gaps in coverage.
If you have any questions about additional insured endorsements, policy endorsements in general, or any other questions related to your business insurance needs, feel free to reach out to one of our expert brokers at any time.
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