Non-Affiliated Additional Insureds – Insured vs Insured

Introduction: The addition of a non-affiliated organization, such as an insured's client, to a policy as an additional insured can be complicated for standard business insurance coverages. This additional insured provision presents even more complications and limitations for specialty lines coverages such as professional liability insurance. While this article will not provide any definitive answers, it will provide general guidance on the prospects of adding additional insureds to professional liability policies and will identify some of the key issues to both the insured and insurer.

Throughout this article we will refer to the entity that has purchased a policy as the "insured" and the entity not affiliated with the insured but desiring to be added as an additional insured as the "non-affiliated" entity.

Additional Insured Requests: It is standard operating procedure for businesses to request their insurer add certain types of additional insureds to their general liability (GL) insurance policy. This request is often motivated by a non-affiliated business that has a working relationship with the insured and needs to be protected from the insured's activities. The concept is to protect the non-affiliated business from claims arising out of the operations of the insured over which, in theory, they have no control. For example, a landlord may request their tenant add them to their general liability insurance policy for protection against claims that occur in space for which the insured is responsible. Typically these requests make sense and are frequently granted.

Professional Liability Policies are Different - the Theory: Professional liability policies provide protection to the insured for claims (lawsuits) brought against them by third parties for errors or negligence in providing professional services. The objective is to provide protection to the insured from claims made against them by third parties for whom the insured is performing services.

From time to time we receive requests to add non-affiliated entities as additional insureds to our insured's professional liability policy. This request is usually motivated by a request from our insured's client or client's attorney, often in conjunction with a contract. Sometimes the contract also includes a related indemnification agreement, which adds additional complexity. It is not advisable or practical to add non-affiliated entities as additional insureds to a professional liability policy for the following reasons:

  • Coverage will be denied under insured vs insured exclusion
  • Unnecessary since client can recover damages with lawsuit
  • Insured will be providing protection without regard to fault
  • Coverage, and other rights, provided without underwriting
  • Insured may sustain erosion of limits

Insured vs Insured: The simple reason not to add a non-affiliated organization, such as a client of the insured, as an additional insured is that any claim they might bring against the insured will be excluded under the insured versus insured exclusion contained in virtually all professional liability policies.

What is the insured versus insured exclusion? Since insurers will not provide protection for claims brought by the insured against themselves, professional liability policies contain a provision called an "insured versus insured" exclusion. This provision excludes claims brought by one insured, say an employee, against another insured, say the corporate entity. The following wording is an example of a typical and simple insured versus insured exclusion:

This Policy does not apply to any claim brought by any Insured against any other Insured.

Underwriters are not willing to remove the insured versus insured exclusion because they do not want to cover a claim that involves inherent conflicts among insureds and has the potential for abuse.  For example, if a non-affiliated entity were added as an additional insured and then brought a claim, the claim would not be covered because of the insured versus insured exclusion. Both entities are insured under the same policy. This situation is detrimental to both the insured and the non-affiliated entity because neither will have the intended coverage available to provide protection in the event of a claim.

Often an additional insured request is motivated by a more complex situation. The request to add a non-affiliated entity as an additional insured might be motivated by the non-affiliated entity wanting protection from the insured's policy for claims made by third parties against it for actions by the insured. This request occurs frequently, particularly when the insured is a sub-contractor to the non-affiliated entity. An example of this situation is a consultant providing expertise, as a sub-contractor to another consultant, on a project the other consultant is working on for a third party client.

Unnecessary to Extend Coverage: In this situation adding the client to the insured's professional liability policy is not usually the answer. The additional insured route is not necessary since our legal system allows for third party actions to ensure that the proper entity is part of the lawsuit. When a claim is made against it, the non-affiliated entity can, and usually does, bring a claim against the insured for damages from the insured's negligence in providing professional services.

Fault Should be Considered: It is not always clear who is at fault when a claim occurs, and fault will determine where liability and coverage should end up. There are many claims situations where the non-affiliated entity is partially or wholly at fault. Additionally, there could be situations where the non-affiliated entity is at fault in a claim situation not involving the insured at all. The insured does not want to be providing coverage to the non-affiliated entity for the non-affiliated entity's errors.

Coverage Rights Extended: The non-affiliated entity will have coverage under the insured's policy if they are an additional insured, regardless of fault, because an additional insured typically has the same coverage and policy rights as the insured. This is potentially a serious problem for the insured. Not only should the insured not be providing coverage to the non-affiliated entity for their errors, the underwriter is not typically going to provide coverage to an entity that it has not underwritten.

Reduction in Coverage: An additional important reason for the insured not to add non-affiliated entities is that it could potentially reduce some or all of its own coverage through erosion of limits. By providing coverage for a non-affiliated entity the insured is providing its coverage and limits to another organization. The non-affiliated organization might utilize part or all of the limits available with a claim of its own, leaving little or no coverage for the insured.

The Solution - Certificates of Insurance: The best solution is to provide the client of the insured with a certificate of insurance. The certificate of insurance provides relevant information to the recipient on the insurance in force. The recipient can then be comfortable that liability insurance is in place to protect the insured should the recipient need to recover damages from the insured in a lawsuit.

Conclusion: Except in the most unusual circumstances (which we cannot contemplate!), it is not advisable or practical to add non-affiliated entities as additional insureds to a professional liability policy.

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Tennant Risk Services
124 LaSalle Road
West Hartford, CT 06107
Phone: (860) 969-5201
Fax: (860) 216-5845

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