An additional-insured clause is an amendment to an insurance contract that provides insurance rights to other parties involved in a business transaction. It serves to protect the additional parties in the event of negligence on the part of the primary policyholder, also known as the named insured. In the building and construction industry, adding additional insureds is considered to be a standard operating procedure.
An additional-insured clause is designed to extend rights to a party other than the primary named insured that is listed on the policy. In the building industry, it is often used to grant certain rights by the building contractor to the property owner, although it can also apply to other lines of insurance. Coverage is usually designed for specific insurance claims.
The need for additional-insurance clauses has risen in part as a result of the increase in the number of lawsuits in the contracting industry as well as society in general. According to Buildings.com, many in the building industry fear litigation, so they seek to be added to insurance contracts as a method of protecting themselves, even if they are not directly responsible for damages caused.
There is a common misconception that if a party is issued a certificate of insurance, it is the same as being an additional insured. An example of this is in the auto insurance industry when a third-party lien holder such as a bank is issued a certificate of insurance as proof that the insured is carrying specified coverage and amounts. In reality, the lien holder has no additional insurance right, only the right to be notified if the insured attempts to lower coverage limits.
The number of additional insureds added to a policy can affect how benefits are paid out. Since policy limits are available to all additional insureds as well as the named insured, in the event of a loss, the policy proceeds can be used up quickly. Consequently, if a large number of additional insureds is being added, it is advisable to consider raising the policy limits.
In order to protect itself against unlimited liability claims, the company offering the coverage for the additional insured should spell out that the coverage is limited only to negligence of the named insured, as well as placing a cap on the amount that will be paid out. This should be done at the time the contract is drawn up.