Banks Improperly Requesting Additional Insured Status – Part 2

Our friend, Christopher Boggs, Chief Consultant with Boggs Risk and Insurance Consulting, returns to respond to a great comment left on his recent post. He’ll tell you more below. Happy reading.

Several days ago I published an article entitled, “Banks Should NOT be Asking for Additional Insured Status.” In this article I argued that banks should NOT be requiring additional insured status on the borrower’s liability policy as a condition of the loan.

After several attempts at posting this article in various locations I finally got a response from a party defending a bank’s request to be an additional insured. The response read:

Lenders have deep pockets so are often named, whether rightly or not, as co-defendants along with the borrower when someone suffers injury or damage because of the borrower’s operations. This can be an issue particularly in the context of loans secured by real estate. Because the lender is at arm’s length from control, you are right that they shouldn’t be implicated, but often they get dragged in anyway. Having additional insured status helps address defense expense until the lender can get dismissed. The borrower is probably obligated to indemnify the lender anyway, so this is not as misdirected as you suggest.

I am so happy to finally have someone offer an opinion. While I think this is a great point, unfortunately, this opinion does not offer valid reasoning for additional insured status. This is a reason without effect.

ISO’s commercial general liability (CGL) policy extends insured status to three “levels” of insureds within the policy language:

• Named Insureds: Granted the broadest coverage
• Extended Insureds: Generally those natural persons who own and/or run the business such as directors, officers and LLC managers/members.
• Automatic Insureds: These are most commonly the people who actually do the work of and provide the services/products of the business such as employees and volunteers.

Beyond these, the policy allows for the inclusion of “additional insureds” by endorsement. Additional insureds, as stated in the prior article, are those with an ongoing business relationship (usually created by contract) or a symbiotic relationship with the insured.

Banks, as previously stated, hold neither of these relationships.

But the person who responded to and commented on the prior article mentioned that even though banks don’t have either of these relationships, they may get pulled into a suit and thus should be additional insureds.

While it may be true that a lender may be improperly pulled into a suit, this contention forgets one key element of ISO’s CGL. Not only does the CGL extend coverage to the previously referenced insureds, the policy also extends protection to contractual indemnitees.

Paragraph 2 in SUPPLEMENTARY PAYMENTS – COVERAGES A AND B reads:

2. If we defend an insured against a “suit” and an indemnitee of the insured is also named as a party to the “suit”, we will defend that indemnitee….

Status as an indemnitee is created by the provisions of the loan documents and the inclusion of an indemnity agreement. Additional insured status is NOT required for the bank to garner defense and protection from the insurance carrier.

If the bank truly believes it has an exposure, such exposure should be managed via contractual risk transfer and the indemnity provisions that requires the borrower to indemnify, defend and hold the bank harmless in the event they are pulled (even wrongly) into a suit. This is the appropriate method for the bank to manage this potential.

Additional insured status should be limited to ONLY those parties with an ongoing business/contractual relationship with the named insured or those with a symbiotic relationship. Only those parties having such a relationship with the insured have TRUE vicarious liability for the actions of the named insured.

Insurance policies are NOT intended to accomplish a goal that is much better accomplished by contract and contractual risk transfer. Insurance is only a financing mechanism; contracts and contractual risk transfer is the primary source for managing and transferring risk. The unendorsed CGL supports the proper use of contractual risk transfer.

So far, no one has offered a viable reason a bank should be granted additional insured status as a requirement for a loan. But I’m still interested in opinions.