Insurance Academy

7 Rules for Extending ‘Insured’ Status

By | June 16, 2015

True story: The agent convinced the owner of several apartment buildings to purchase a pollution liability policy – because of the age of the buildings and the presence of asbestos and lead. A tenant’s young child ate some of the lead-based paint still present from years past.

The parents sued the building owner, the owner turned in the claim, and the pollution liability carrier correctly denied the claim.

There was NO question of coverage; in fact the claim discussion never made it that far. The claim was denied because the building owner was NOT a named insured on the policy. When the policy was written, the agent named the property manager as the insured and not the building owner.

Rule #1: If the person or entity causing or suffering the damage or harm is NOT an insured, there is no coverage. The correct named insured(s) is/are imperative. Regardless of how well the coverage has been designed, no one will ever have the opportunity to admire the skill of the agent if insured status is not correctly extended.

Rule #2: Incorrectly or improperly extending insured status places the insurance carrier’s financial resources unnecessarily at risk. Don’t name individuals or entities without fully understanding their relationship to the exposures being insured. Doing so extends protection to persons and activities unrelated to the operation being underwritten.

Rule #3: The insured is ALWAYS a person and person types should not be mixed when naming insureds. There are two types of persons: 1) natural persons, and 2) legal persons. A natural person is a flesh and blood individual (examples include sole proprietors, partnerships, and in some states, LLCs). A legal person is an entity “born” by the filing of legal documents such as a corporation, professional association, and, in some states, LLCs.

Natural and legal persons have the same rights and are equal in the law. Both can own property, sell property, hire people, fire people, sue, and be sued.

Person types should not be mixed. The list of insureds should be all “legal” persons or all “natural” persons. If the insureds are “natural” persons, the operation’s “assumed” or trade name (how they are known in the community) must be used.

Rule #4: One person type cannot do business as (DBA) another person type. Tucker, Inc. cannot DBA Boggs, Inc.

Rule #5: Only when there is common majority interest should multiple entities be listed as named insureds on one policy. Applying this rule rigidly means there must be at least 50.1% common majority interest between or among the entities listed before they are listed on the same policy. There is an allowable exception to this rule based on the commonality of owners and the commonality of operations.

Rule #6: Common majority interest is created by more than just “ownership.” Beyond ownership, common majority interest can be created by owning a majority of the voting stock, sharing a majority of common owners, having a majority of common board members.

Rule #7: Don’t combine dissimilar operations onto one policy just because common majority interest exists. Don’t combine a sandwich shop and a metal working shop onto the same policy simply because they are owned by the same “person.”

Know these rules to avoid the improper extension (or non-extension) of insured status. Applying these rules avoids ticked off insureds and errors and omissions suits.

Thursday, June 18, the Academy of Insurance is hosting a class on the proper naming of insureds, greatly expounding upon these seven rules plus several other “insured status” topics not included in this article. Register today for this great opportunity to avoid ticked off insureds and an E&O suit.

Topics Pollution

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