Additional insureds are typically required on Commercial General Liability (CGL) policies of prime contractors and subcontractors. An owner may require the prime contractor to name them as an additional insured on their CGL policy. Similarly, a prime contractor may require the subcontractor to add the prime as an additional insured on the subs CGL policy.
When either of these situations take place, the additional insured (whether it be an owner or the prime contractor) receives two primary benefits. First, the additional insured receives added coverage at no extra cost to them because only the named insured is required to make payments on the premium. Second, an insurer may not pursue a subrogation claim against any additional insured because an insurer cannot sue its own insured for indemnity. In order for the additional insured coverage to apply, the policy must state that there is such coverage. Typically, the policy states that it provides coverage under an insured contract.
Policies that grant a prime contractor or owner additional insured status create a number of problems for the named insured. First, on larger projects with multiple additional insureds, the named insureds face the risk of having their policy diluted to such an extent that they are unable to satisfy additional insureds claims because the coverage has been exhausted. This creates problems for the named insured because they may not have any coverage for themselves.
Second, and building off the first issue, the named insured faces the risk of increased premiums because of the volume of additional insured claims made under the named insured’s policy. This is an especially keen problem to subcontractors because they do not obtain policies on a project-by-project basis. Multiple additional insured claims will, at the minimum, increase the named insureds premiums, and potentially lead to the named insured insurance provider to decline to continue providing coverage.
Third, the named insured faces the risk of paying a deductible that can range anywhere form thousands to millions of dollars for a “bogus” claim brought by an additional insured. What makes these claims “bogus” is that the subcontractor may be found to be completely without fault or only minimally at fault, yet still find themselves on the hook for the deductible.
Last, and an overarching principle of the above three problems, is that the additional insureds have less incentive to be as careful or responsible as they might if they did not have the added benefit of being an additional insured. This is known as a “moral hazard.”
Subcontractors need to be careful in negotiating with prime contractors and owners so as not to fall into any of the above-mentioned traps. Securing counsel well versed in the language of construction and contract law will help to keep policies intact, premiums to a minimum, and less risk of paying expensive deductibles.