How to Properly Extend Insured Status

Odd but true: The agent called and asked the underwriter to amend the named insured. The insured had policies with two different insurance carriers. Apparently the other insurance carrier had misspelled the named insured on its policies. That’s not the odd part. The odd part is that the agent requested the insurance carrier that had spelled the named insured correctly to intentionally misspell the named insured to match the other policies.

Of course the underwriter refused pointing out that by intentionally misspelling the named insured, a potential loss of coverage was created. The claims department does not work will with “intent.” (The obvious question, why wouldn’t the agent have the incorrect policy corrected? I have NO idea.)

There are seven key rules for extending status as an insured. These are:

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. They 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.”

Thursday, January 7, the Academy of Insurance is hosting a class on the proper naming of insureds that greatly expounds on these seven rules plus several other “insured status” topics not included in this short article. Register today for this great opportunity to avoid ticking off your insureds and an E&O suit.