Partner Perspectives: Beyond the Limits — The Hidden Costs of Additional Insured Endorsements

Understanding the Costs and Pitfalls

When it comes to insurance policies, fine print is critical — especially when business agreements request additional insured endorsements. These provisions can carry hidden costs, leaving named insured parties to unfairly shoulder financial and legal burdens. Knowing the nuances of these endorsements is essential to avoid elevated insurance costs or inadvertently paying for another party’s mistakes.

What Is an Additional Insured Endorsement?

An additional insured endorsement extends coverage to a third party (the “additional insured”) for claims related to damage caused by the named insured. While this arrangement might seem straightforward, third parties often request provisions that complicate the agreement, increasing costs or introducing unfair obligations for the named insured party.

Key Terms and Contract Language to Understand

Terminology in contracts is pivotal. “Named insured” and “additional insured” are not interchangeable. A named insured party holds comprehensive coverage and associated responsibilities, like paying premiums. In contrast, an additional insured’s coverage is usually narrower and defined by the endorsement.

Contracts often include specific phrases that insured parties must scrutinize:

• Primary and noncontributory: The insured party’s policy pays first and solely, without requiring contribution from the additional insured party’s coverage.
• Waiver of subrogation: Prevents the named insured party’s insurer from recovering costs from the additional insured or their insurer, even when the additional insured is partially at fault.

Understanding these terms helps insured parties negotiate fair agreements.

Are Additional Insured Endorsements Fair?

Initially, the concept of an additional insured endorsement seems fair: Insured parties pay for insurance that covers claims against the third party for damage that was caused by the named insured. But, in some instances, additional insured parties will demand to be covered by the named insured’s policy for claims that are solely their fault. When it comes to claims caused solely by the third party or by both the named insured and the third party, the advantage can shift dramatically toward the additional insured. It would seem logically fair for the third party or their insurance company to pay for the portion of the claim they caused, but the named insured’s insurance company can be on the hook for 100% of claims in a variety of situations, based on the endorsement’s specific language. For example:

1. Behavioral health care providers: A state may request additional insured status on a provider’s policy. If the state’s undisclosed information about an at risk foster child leads to harm, the provider’s policy might cover the full claim, even if the state shares fault.
2. Landlords: If an insured party rents space and a building owner fails to disclose code violations (e.g., unsafe stairs), the named insured’s policy could pay for injuries entirely, despite the landlord’s partial responsibility.
3. Equipment leases: Organizations that lease equipment for professional services, such as copy machines, often ask to be named as additional insured parties on general liability policies. If a leasing company installs defective machinery, the named insured might face full liability for related claims.
4. Hospital contracts: In suicide risk assessments, errors by emergency room staff (e.g., missing critical patient history) could leave behavioral health care providers’ policies liable for all resulting claims.

These scenarios illustrate how specific endorsement language can create inequities, forcing named insured parties to bear excessive responsibility.

Impact on Insurance Costs

Additional insured endorsements can significantly increase insurance costs in several ways:

1. Reduced policy limits: If an insured’s policy covers claims fully — even when responsibility is shared — available coverage may be exhausted prematurely, leaving the insured party vulnerable to future claims.
2. Defense costs: Defending an additional insured typically incurs higher legal and expert witness fees, further diminishing the named insured’s policy limits.
3. Loss history: Claims paid under these endorsements contribute to the insured’s loss history, which can result in higher premiums or difficulties renewing or securing new coverage.

How Can Your Insurance Broker and MHRRG Protect You?

Brokers play a crucial role in shielding insured parties from unfair additional insured endorsement requests. Strategies include:

1. Reviewing contracts thoroughly: Brokers should help insured parties assess contract provisions to understand potential liabilities and impacts.
2. Negotiating terms: Clients should avoid agreeing to primary, noncontributory clauses or waivers of subrogation. Instead, they can request fairer terms that allocate responsibility proportionately.
3. Consulting professionals: Before signing, insured parties should seek their insurer’s review and approval of endorsement language. This ensures compliance and avoids breaches of contract.
4. Educating clients on indemnification: Many contracts obligate insured parties to indemnify third parties fully, regardless of insurance coverage limits. Brokers should help clients understand these obligations and negotiate limits when possible.
5. Ensuring compliance: Clients should confirm that the additional insured provision aligns with their policy, mitigating risks of breach.

Bottom Line

Additional insured endorsements can introduce hidden liabilities that aren’t apparent until a claim arises. Proactively addressing these challenges by understanding contract language, resisting unfair provisions and consulting industry experts can protect insured parties from excessive costs and risks. By carefully reviewing contract details and securing approval for policy language, clients and brokers can reduce potential liabilities and ensure compliance.

For specialist guidance, have your broker contact Negley Associates today.

About MHRRG

The Mental Health Risk Retention Group (MHRRG) provides tailored liability insurance for the behavioral health care field. Owned by policyholders and endorsed by the National Council for Mental Wellbeing, MHRRG offers stabilized premiums, comprehensive coverage, protection against arbitrary cancellation and a robust loss prevention program to support community mental health centers nationwide.