Vendors and other independent contractors should be covered by Commercial General Liability (CGL) and Professional Liability Insurance (PLI) policies, which protect them against the consequences of accidents, errors and omissions, mistakes, and oversights when providing services to clients like you.
If they don’t have this coverage (and, in fact, a solid vendor agreement will require vendors to carry these policies), you should rethink your relationship. If they do, you want to be listed as an additional insured.
What is an Additional Insured?
An additional insured is a party covered under a vendor’s CGL or PLI policy because they have a business relationship with the vendor that makes them vulnerable to being sued for the vendor’s acts under contract. In other words, you could be sued for conduct that is within your vendor’s scope of duty – and you’d like them to insulate you.
When Should I Be an Additional Insured?
The short answer is: whenever there’s a risk that the vendor’s actions or omissions under your agreement can result in a lawsuit against you by a third party.
Consider a product that is physically or chemically changed while under the vendor’s control; damaged, destroyed, or delayed inventory; a vendor’s failure to inspect, test, or service a product; a manufacturing defect. Draw on your experience and the experience of those in your industry to identify your vulnerable points, and then make sure your scope of coverage is large enough.
What is My Scope of Coverage?
Some vendor insurance policies have blanket language that automatically covers certain parties for all vicarious liability; this is ideal but not very common, as those policies are expensive. If you don’t have blanket coverage, you’ll need what’s called an endorsement that acts as a kind of rider on the policy, adding you to coverage for particular claims against.
The language of the endorsement determines the scope of coverage. Most policy writers will use standard endorsement language provided by Insurance Services Office (ISO) – but you can draft your own if the vendor is amenable and the price is right.
Remember that the basis for the additional coverage is the endorsement; and the basis for the endorsement is the contract between you and your vendor. It goes without saying that you should always have your agreements in writing. In that writing, you should also have the vicarious liability coverage requirement and the scope of the policy, where possible.
How Does This Policy Operate?
A couple notes on the logistics of being an “additional insured” on your vendor’s policies. First, you should be aware that you, the vendor, and any other additional insured will share the limits of the policy – both the “per occurrence” and “aggregate” limits.
Second, you should structure the payout to occur on a “primary” basis – meaning that if a claim is filed against you (the additional insured), the policyholder’s (the vendor’s) insurance should pay before your personal insurance kicks in; this will save your own coverage until the additional insured coverage has been tapped out.
But be mindful that the goal of an additional insured endorsement is to avoid vicarious liability, not primary liability. Most additional insured endorsements exclude claims attributed solely to the additional insured’s acts, omissions, or negligence, so you still need to carry your own appropriate CGL and PLI policies.
Thank you for your continuing interest in the premium content provided by DR&A. As always, we’d love to continue the conversation in the comments, by phone, or in person.