Agents E&O Loss Prevention
Is blanket additional insured coverage truly blanket?
Check the level of AI coverage provided in company forms
By Curtis M. Pearsall, CPCU, AIAF, CPIA
The concept of additional insureds has been around for quite some time, possibly since the beginning of modern day insurance. Why then has this issue become a major hotspot that is resulting in a significant number of E&O claims?
There are a number of reasons. The main issue involves the actual blanket additional insured coverage form and whether that really offers the coverage that the form implies.
First, what is an additional insured? Essentially, it is a person or organization that is provided the status (and subsequent coverage) by policy form or by being specifically identified via endorsement. Let's address a scenario in which your customer needs a certificate naming an entity as an additional insured. The customer stops by your office. You bring up the file and note that blanket additional insured (AI) coverage is provided. Are you all set? Maybe; maybe not.
Almost every blanket additional insured form contains a requirement that must be met in order for that entity to achieve additional insured status. Typically, the "Who is an Insured" section includes a requirement that the insured and the entity requesting additional insured status have agreed in writing in a contract or agreement that such person or organization be added as an additional insured.
So what does this really mean? It means that without a written contract, the Blanket Additional Insured form does not afford additional insured status. Because this is a very common misunderstanding among agencies, it is important to establish a procedure in which the agency always checks a customer's written agreement before issuing a certificate. This will help to determine what further actions might be necessary to provide the necessary coverage.
If there is not an agreement in place, it will then be necessary to request an endorsement from the carrier to provide this coverage. Because on numerous occasions carriers have not been willing to grant this coverage, it is best to check prior to verifying coverage via a certificate of insurance. If the carrier underwriter grants the request, it is best to document this conversation not only in your system but also with an e-mail to the carrier underwriter summarizing the discussion and understanding.
What if you don't have the agreement or the additional insured doesn't know if there is a written contract/agreement in place? What should you do? Many agencies have included the following language: "Coverage as an additional insured is provided if required by written contract." If you take this approach, bring this language to your customer's attention as it essentially puts the responsibility on your customer or the certificate holder to determine whether there is a written contract in place or not. Without the written contract, once again, the blanket additional insured coverage does not provide the necessary coverage.
Currently, E&O carriers are stating that approximately 5% of all E&O claims are the result of the manner in which additional insureds are dealt with on certificates of insurance. It is important for agents to be aware that a person assumes some definite responsibilities by signing a certificate of insurance. It is always recommended that the person signing the certificate should be licensed in the state where the client is doing business. So if you are in Massachusetts and you insure a client in New York, be sure that whoever is signing the certificate is licensed in New York. Take the time to verify that the entity requesting additional insured status is being provided that coverage via the policy form or through an endorsement.
A number of years ago, there was similarity among the many additional insured forms. That is certainly not true today, as it appears many carriers have developed their own forms. Since there may be a difference between the specific carrier additional insured forms, it is important to carefully check the form in question. If you don't have a copy of the exact language, ask the underwriter for a specimen form.
One other issue is causing some E&O problems. The many additional insured forms can provide different types of liability for the additional insured. This is generally known as the breadth of coverage and falls into three categories:
1) Coverage for the sole negligence of the additional insured.
2) Coverage for the additional insured's negligence, but only if the named insured shares in the negligence.
3) Coverage for the additional insured for vicarious liability due to the negligence of the named insured.
Thus when you are asked to provide coverage for an additional insured, it is extremely important to determine (through a contract) exactly what level of liability the additional insured is requesting.
Other important issues to understand and be on the lookout for:
If the policy has been endorsed to provide coverage for an AI (or afforded under the blanket AI form), with the exception of policy limits, the policy applies to each insured as if the insured is the only insured. Also, the policy exclusions that apply to the named insured also apply to the additional insured.
Handling coverage for additional insureds is not as easy as it might appear. It requires great attention to detail. By taking the time at an upcoming staff meeting to review this issue with the account execs and producers to ensure a solid understanding, you should be able to keep this issue from becoming an E&O headache.
Curtis M. Pearsall, CPCU, AIAF, CPIA, is president of Pearsall Associates, Inc., and special consultant to the Utica National E&O Program. He writes a blog on E&O insurance at: www.agentseotips.com. He can be contacted at firstname.lastname@example.org or (315) 768-1534.