Why Do It? Additional Insureds – Part III

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Contractual risk transfer is considered a valid method for transferring risk. Simply put, it involves an attempt to allocate any potential liability that could arise in connection with the performance of a contract between two parties. The contract serves as the vehicle to effect those transfers that might not have occurred under common law had there been no contract.

The theory of contractual risk transfer is to make the party with the most control over the risk be financially responsible for that risk. The contractual provisions used cause the transfer include hold harmless, indemnity and insurance provisions contained in the contract.

The primary motives for requiring additional insured status on the liability policy of another party strengthen the risk transfer in ways hold harmless and indemnification provisions do not:

  • It may reinforce risk transfer otherwise accomplished through the indemnification agreements that could be invalidated by the courts or by statute.
  • It could make it more difficult for a court that finds an indemnity agreement to be void to find that the insurance required in the contract is solely for the purposes of indemnification and thus tied to the invalid indemnity provision.
  • It may allow one party to transfer liability arising from its sole negligence to the other party's insurer, even in those states that prohibit broad form indemnity clauses.
  • It may give those who attempt to transfer risk to others direct rights under the other party's insurance, particularly with respect to defense coverage.
  • It provides the additional insured with direct defense coverage that applies in addition to limits without requiring that a host of conditions be met, as is the case with contractual liability coverage.
  • It may prohibit the indemnitor's insurer from subrogating against the indemnitee when a loss is caused by the indemnitee's acts or omissions.
  • It may provide the indemnitee with personal injury liability coverage.
  • It may avoid having losses impact the loss history of the additional insured, thus avoiding future premium increases.
  • It may substantially increase the limits of insurance available to the additional insured for a given operation or project.
  • It may lessen the chance that the additional insured will be forced to sue the indemnitor directly in order to be made whole following a claim or suit.
  • It may increase the chances of cooperation between the indemnitor and indemnitee in the event of a claim or suit.

Although hold harmless and indemnification are strong tools, the assignation of additional insured status to the indemnitee should not be overlooked for all the reasons listed above. Equally important, additional insured status should not be assumed to have been effected simply because it was stated in the contract.

It is essential that the indemnitee verify compliance with terms of the contract through collection of appropriate certificates of insurance, policy endorsements, or both. Failure to enforce contractual requirements is the primary cause of claims falling back on the indemnitee, claims that could have been avoided had proper verification been imposed on the contracting processes of the parties.

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