Unravelling myths surrounding additional insured coverage.

Additional Insured status is a common, though often elusive, concept in many real estate contracts.

All too often, the parties merely "check the box" by making sure that the words "insurance" and "additional insured" appear in the contract and then give no further thought to whether the words in the contract are sufficient to confer any insurance rights at all.

Before entering into your next agreement, consider the following myths about additional insured coverage and best practices tips:

Myth #1 A Certificate of Insurance Establishes Additional Insured Status.

This is a common misconception. A "certificate of insurance" is a pre-printed form that is usually prepared by the named insured's insurance broker. The certificate is being provided only for the purpose of demonstrating that the "named insured" has coverage. To obtain additional insured status, the certificate must identify the recipient's company by name and designate it as an "additional insured." Alternatively, the company should review the named insured's policy to determine whether it contains a "broad form" additional insured endorsement, which typically applies to "insured contracts" with the named insured.

Best Practices Tips: Don't find yourself thinking about these issues only after a loss has occurred. Ask for the certificate of insurance. Read it to ensure that the certificate identifies your company by name and as an additional insured.

Myth #2 Limits of Liability Identified In The Certificate Will Be Sufficient And Available to Cover Loss.

Most contracting parties include "minimum" insurance limits that must be carried while the contract remains in effect. Thereafter, the party receiving the insurance assurance sometimes requires production of the certificate of insurance to demonstrate compliance with the contract provision. However, many parties overlook three critical issues that often arise.

First, the limits will be available to both the named insured and the additional insured, therefore, the limits may be eroded quickly. Second, the limits identified in the certificate will be available to the named insured and other additional insureds for other losses that may take place during the policy period. In other words, regardless of the number of: (a) contracts that the named insured enters, (b) additional insureds which may have rights under the policy, and (c) losses that may be experienced, the insurance company has contracted to provide one aggregate limit that will be available during the policy period to all parties. Third, in some policy forms, defense costs paid on behalf of an additional insured may erode the policy limit.

Best Practices Tips: Companies that intend to rely on the insurance of a contracting party must: (a) develop minimum limit requirements that evaluate a realistic loss scenario; and (b) ask not only for the certificate of insurance but also obtain representations regarding: (i) the number of other additional insureds that may have access to the subject policy; and (ii) the level of limit erosion, if any, for the insurance policy that is being offered. Conversely, the party supplying additional insured coverage must be sure that: (a) all defense costs are paid "outside" of the limits of liability; or (b) its defense obligation is capped at a reasonable amount.

Myth #3 An Additional Insured Will Only Have Access To The Named Insured's Policy For Vicarious Liability.

Courts do not always limit the scope of insurance available to the landlord to those scenarios where the landlord is being held vicariously liable for the conduct of the tenant. Many courts have allowed landlords to recover under the tenant's policy where the loss "arises from" the use of the leased premises, even where the landlord has caused the loss through its own negligence. When courts evaluate whether additional insured coverage should be limited to vicarious liability, the contract language establishing the insurance requirement becomes the linchpin of the analysis. Courts routinely strive to fulfill the "reasonable expectations" of the contracting parties and may broadly construe the insurance obligations unless the contract mandates a narrow scope of coverage.

Best Practices Tips: The party required to supply additional insured coverage should take care in the contract drafting stage to make clear that its insurance obligation is limited to loss that arises from the named insured's negligence. Alternatively, the party required to provide insurance may seek a cap of its overall indemnity obligation to account for its potentially limitless liability if the broader "arising from your work" language is used in the contract.

BY LYNDA A. BENNETT, ESQ. ROBERTSON FREILICH BRUNO & COHEN, LLC