Insurance Academy

Renovation at the Deli; A Story About Additional Insureds

By Patrick Wraight | Academy Journal Blog | July 19, 2017

One of the primary questions that have to be asked about an insurance policy is: who is an insured? Every policy has language that defines and limits who is eligible to find coverage there. On the CGL policy, the question of who is an insured requires some thought and more than a little looking around. Of course, the first named insured is always an insured. That’s kind of why they paid for the policy.

Once we find out who the named insured is, we have to find out what kind of entity they are. That will tell us who else is protected by this policy. Some of these automatic insureds have coverage based on what kind of entity the named insured is. There are several other individuals that will have coverage based on their relationship with the named insured. All of these individuals get coverage because they have some kind of connection to the liability exposures of the business.

The next category of insured shows up by endorsement. This is the additional insured. You may be familiar with this, but just in case you are not, the additional insured is always added by endorsement on the ISO CGL policy. The base policy provides coverage for the named insured and the automatic insureds, but all additional insureds require another form to be attached to the policy.

An additional insured is any individual or entity that is not afforded coverage on an insurance policy under normal circumstances. They don’t generally have any reason to be insured by a policy. A general contractor that doesn’t have a business relationship with a deli in your area has no liability exposure related to the deli. There isn’t even any relationship between them when the contractor stops in there for lunch this week. What happens when the deli owner calls the general contractor for a quote for some renovations? Now we might have a business relationship that creates an insurance relationship.

The deli owner (Frank) called the contractor (Jimmy) and asked for a quote to build out his second floor into more dining space. Jimmy’s quote is the best one for Frank so they agree to the work and Jimmy gets to it. Is there an intersection between liability exposures now? Yes, there is. If you answered no, read on and hopefully, you’ll come around to our point of view.

The presence of Jimmy and his crew increase Frank’s premises exposure. There’s more going on at his premises. Jimmy’s crew needs to come and go. They need to carry tools and materials up to the second floor. There are back stairs that come from the alley, so they usually avoid the lunch crowd. There are front stairs that need to be blocked off to keep customers out of the construction zone. Yep. The customers on the first floor can see what’s going on upstairs. It’s an open second floor. Jimmy parks two of his trucks in the back alley behind the deli. There is extra sound and dust in the air while the crew is working. You get the point. Frank has an extra liability that his CGL policy didn’t anticipate. When he called his insurance agent to tell him about the construction, that’s when his agent suggested that he ask to be an additional insured on Jimmy’s policy. He also mentioned that they may need to look at his property policy, but that’s an issue for another day.

This is where life gets complicated. This is where misunderstands can be created. Do you know what misunderstandings around insurance create? That’s right. Law suits. We don’t like those so we want to reduce misunderstandings. This is an opportunity to create clear, concise communication that erases misunderstandings.

Let’s start with why Frank’s agent made the recommendation. The additional exposure created at Frank’s deli is all because Frank is having work done there. All of the additional risks are because there are people there that aren’t normally there; they’re doing things that aren’t normally being done there. You can imagine all of the additional exposures of having construction done on the second floor of a restaurant that’s still open during the renovation. So why add Frank as additional insured to Jimmy’s policy? Jimmy’s policy provides him liability protection for his operations as a general contractor. All of the additional exposures at Frank’s are related to Jimmy’s operations. Frank wants to be protected in case his deli (or Frank personally) is sued for damages related to the construction.

As far as we can tell, Jimmy’s exposure at Frank’s should end when he finishes the job. Neither of them is all that concerned about what could happen a few years down the road after the job is finished. Besides, Jimmy is a quality contractor who stands by his work. Jimmy knows that Frank will need to be protected mostly while Jimmy and crew are working in the deli.

Frank’s agent may tell him to ask for a certificate of insurance from Jimmy. He explains to Frank that the certificate is evidence that Jimmy has insurance. There’s more to it than that, but that’s also a subject for another day. By the way, if you need more information about certificates of insurance, let me recommend this resource or this resource from Insurance Journal’s Academy of Insurance.

Back to the policy. There are a few issues that can come up for any of the parties in our story (Jimmy, Frank, or their insurance agents). We understand that neither Frank nor Jimmy can qualify as insured on each other’s policies because there is no permanent or long-term business relationship there. If you were to read through the who is an insured section of their policies, you couldn’t find them there.

We found that Jimmy’s crew’s presence and work at Frank’s deli created additional exposures for Frank and his deli that his insurance policy (and underwriting) didn’t anticipate, so those additional exposures need to find a home. Jimmy already has a CGL policy that provides coverage for his exposures as a general contractor, it just needs to protect Frank and his deli. That’s why he needs to be an additional insured.

Next time we will look at the issues that can come up with this additional insured relationship, depending on what paperwork Jimmy and Frank did, what additional insured endorsements Jimmy’s agent arranges and how they are explained to Jimmy, and what local ordinances may say.

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