Understanding How the “Additional Insured Clause” Works

An Additional Insured Clause is attached to a third-party liability policy in order to extend coverage provided under an insured’s policy to the party named within the clause. A third party, such as a client, vendor, or partner, typically will request additional insured status relating to services performed by the policyholder or as a condition outlined in a contract or agreement.

For example, let’s say ABC Company leases building space from 123 Rentals. 123 Rentals requests that it be named as an additional insured on ABC’s Commercial General Liability policy. An individual slips in the building, breaks an ankle, and subsequently files a claim against both ABC as the tenant and 123 as the building owner. ABC’s Commercial General Liability insurance will defend and/or pay the claim on behalf of both parties, because the additional insured clause extends the third-party liability coverage to the building owner as well protects the tenant.  

However, there are policies for which additional insured status would be impractical and inapplicable due to the nature and type of policy.  For example, at Roanoke Trade, we are frequently asked to provide additional insured status for one of our client’s customers on a Legal Liability or Professional Liability policy. Let’s say a freight forwarder operates a warehouse in which it stores cargo for its customers based on the terms of a warehouse receipt. Customer X asks to be named as an additional insured on the freight forwarder’s Warehouse Legal Liability policy. But if cargo is stolen from the warehouse, other customers will not hold Customer X liable for the loss along with the freight forwarder. Customer X is not a party to the agreement between the freight forwarder and its other customers.  

Furthermore, if Customer X were listed as an additional insured on a Legal Liability policy, it would not be able to recover a claim as it is listed as an insured on that policy.  Most policies contain an “Insured vs. Insured exclusion”, which states that the policy will not cover claims made by one insured against another.   

Now let’s put this scenario to the test with a Professional Liability or Errors & Omissions (E&O) policy. XYZ Company carries an E&O policy to protect against liability exposures stemming from its professional activities as a property broker. XYZ’s largest client, Smith Products, wants to be named as additional insured on the E&O policy.  An additional insured clause would afford Smith coverage if Smith were sued for professional services performed by XYZ. Will a third party ever sue Smith for XYZ’s professional activities? Does Smith ever act in the capacity of a property broker? The answer is no. On the contrary, Smith would sue XYZ if it failed to perform its professional services. If Smith were to be an additional insured on XYZ’s E&O insurance, the policy will not respond to its claim against XYZ, because Smith is now an insured under that policy, not a claimant.

It is prudent for your customers to ask for evidence of insurance to show that you carry the appropriate coverage to pay for claims. However, you may need to educate them about the negative impact an additional insured clause can have when used incorrectly.

Roanoke Trade specializes in insuring transportation and logistics providers. For information about our insurance products and services, surety bonds and ATA Carnets, please contact one of our Roanoke Trade professionals at 1-800-ROANOKE (800-762-6653).