If your business is the typical small or mid sized business, you probably have somewhere between $500,000 and $2 million in liability coverage under your business owner policy (BOP) or commercial general liability policy. How does umbrella coverage work with these policies to provide extra liability protection?
Liability insurance covers you from losses due to claims your company, its employees or products or services caused harm or wrong to a third party. Sometimes, however, your organization can be considered “vicariously liable”. That happens when another business, such as a subcontractor, causes harm when doing work on your behalf. In these cases, you would want the contractor or other business’ policy to apply rather than yours and be under umbrella coverage.
There are two ways to obtain coverage under another entity’s policy. In the first, “contractual indemnity,” your contract with the other party requires it to “indemnify,” or cover you for any liability costs resulting from your joint operations. Alternatively, you can also require the other party to name your firm as an additional insured under its insurance policy.
However, obtaining additional insured status often provides greater protection than contractual indemnity. Some states and courts look unfavorably on contractual indemnity because subcontractors who want business sometimes have little bargaining power. Additional insured coverage, on the other hand, causes no such problems.
For your contractor to provide you with “additional insured” coverage (providing umbrella coverage), it must obtain an additional insured endorsement. Which modifies its general liability policy. Unlike the policy owner (or “named insured”), the additional insured has no responsibility for keeping any records needed for determining premiums, paying premiums or reporting claims.
When you require additional insured coverage under another organization’s policy, you’ll probably ask for a certificate of insurance to provide proof of coverage. Be aware that the certificate provides proof that the coverage existed on the date the certificate was issued. The named insured can cancel coverage without providing notice to you. You can request the insurer to provide you thirty days’ notice of cancellation or non-renewal of the endorsement.
However, the certificate is not part of the policy and not binding on the insurer. In the case of large or high-risk projects, you can request that the contractor modify its policy with an endorsement that obliges the insurer to provide this notice.
Considerations for Subcontractors
If the shoe is on the other foot and you are a subcontractor, obtaining additional insured endorsements for contractors and providing the required certificates can be an administrative hassle. To solve this problem, you can buy a blanket additional insured endorsement. This provides additional insured coverage to any party with which you enter a contractual agreement. Typically that is a construction contract or equipment rental contract.
Blanket additional insured endorsements are not as desirable for the additional insured. Blanket endorsements do not name specific additional insureds, so the insurer cannot provide notice of cancellation or nonrenewal. They usually provide narrower coverage as well. For example, many of these endorsements state that coverage ends when operations are completed. This could be construed to eliminate coverage for claims that occur during operations but aren’t filed until later.