Rely On Your Own Insurance And Stop Arguing About It (Again)

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It doesn’t matter how much you want to continue riding. Beating a dead horse isn’t going to get you anywhere. Or, so we have been told. Nonetheless, we are going to say, for the umpteenth time, landlords and tenants should carry AND RELY UPON their own insurance policies.

But, why should I? After all, can’t I just be happy knowing that I am an “additional insured” on the other’s commercial liability policy? [Just to make the Ruminations position clear: NO.] Before we elaborate on “here’s why,” we’ll digress. [Casablanca: “I am shocked – shocked – to find out” that Ruminations will digress.] Find us the person that couldn’t have spent more time with friends and family if she or he hadn’t been on the phone arguing with someone over the “additional insured” language in a lease, mortgage or other agreement.

Despite many hours fighting others on this point, we know that adding another party (and most qualify) as an additional insured on a commercial liability insurance policy is “free” and “easy.” There are more than 30 different, standard form endorsements available for the overwhelming dominant form of commercial liability insurance policy. Though many are tailored for the construction industry, many others are designed for leasing and lending relationships. So, keep that in mind because, if you are “hyper” about requiring someone to name your “side” as an additional insured, maybe you ought to specify under “which” endorsement (or its functional equivalent). Parsing the list of such endorsements is for another day. If waiting for that day doesn’t work for any particular reader, call a competent insurance professional for guidance.

What about “free”? How can that be? We all know that there is no such thing as a free lunch. [Old time salon habituates may remember when such lunches were free in that habitat.] Here’s our answer: “You get what you pay for.” Basically, because liability policies include “contractual liability” coverage and that means paying out when the named insured has indemnified the “other” contracting party, the insurance company was on the hook anyway and the basic policy premium already accounted for the risk. Adding someone as an additional insured added very little exposure for the carrier. So, “free” really means that the basic policy premium already covered the risk.

Now, readers, follow along. An additional insured is liable to the injured person or for the damaged property (almost) only when it has done something to cause the injury or damage. It might get sued even if it was home that day, but unless it somehow was involved in the incident triggering the claim (or some public policy made it liable regardless), it won’t owe nobody nuthin’. Even if it was involved, there may have been other bad actors. In some cases, the additional insured might be the sole cause of the injury or damage and we might say that it was “solely negligent.” If it was solely negligent, the other party (i.e., the one on whose policy the additional insured is named) did nothing that would result in a successful, direct claim against it by the party who was harmed.

Assuming the additional insured was solely negligent, how would the actual policy holder be involved? That’s where the “indemnification” provision comes into play. At one time, in a lot of jurisdictions, one party could agree to indemnify another party even for the indemnified party’s sole negligence. In some states there was no magic language to do so. In others, all you had to do was make it absolutely clear that sole negligence was covered. Keep the concept of “sole negligence” in mind. It is key to the rest of the story.

One by one stones fell (until there was an avalanche of stones) and, state-by-state, laws were passed (or regulations were promulgated) banning or severely limiting the indemnification of parties for their own sole negligence. This isn’t the place to discuss whether consensual risk-shifting agreements should implicate public policy because few legislators and regulators are on the Ruminations mailing list. The effect of this was to make the additional insured coverage more meaningful because, now, its coverage was no longer substantially coextensive with the built-in contractual liability coverage in the policy. The additional insured coverage was no longer duplicative of the contractual liability coverage and the insurance company’s exposure should have warranted an additional premium. [Now, if all policy holders had the same number of additional insureds with the same potential risks, the basic premium could be adjusted. But, that’s not what the universe of policies looks like.]

Did the insurance industry move to a model where a policy holder pay an additional premium for an additional insured endorsement? No, not yet (if ever). What did the industry do? That’s not a hard one – it sought to reduce the breadth of coverage for additional insureds. And, it has been successful.

When many of us who grew up (though that’s not Ruminations) were growing up, an additional insured was covered if the incident “arose out of” the work or operations performed for the policy holder. That was broadly construed by courts despite the insurance industry’s attempts to persuade judges that the policies meant otherwise. Thus, in 2004, instead of providing coverage for injury or damage, in whole or in part, “arising out of” the additional insured’s activities, policy coverage became limited to the “acts or omissions” of the policy holder. That was intended to exclude coverage for the sole negligence of the additional insured because, if the additional insured had been solely negligent, the injury would not have arisen out of the policy holder’s activities. Basically, the insurance industry wanted to limit additional insured coverage to where the additional insured was vicariously liable or had only contributed to the negligence that caused the injury or damage. [What is “vicarious liability”? That’s where someone is held liable for another’s acts or omissions. For example, in some states, by statute, the owner of a car is held liable for what the driver damages even if the owner did nothing wrong.]

Basically, that didn’t work. While the insurance industry thought that by limiting an additional insured’s coverage to situations where the policy holder had done something or failed to do something, basically to situations where the additional insured would be “vicariously liable” for things that were the policy holder’s fault, courts read the new language as meaning there would be coverage if there was “proximate causation.” [We’re not going to expound on that. Just accept that the new language did not exclude situations where the additional insured was solely liable for the injury or damage.] The courts’ logic was that vicarious liability is implicated only if the policy holder was the sole cause, but additional insured coverage, by the endorsements’ text, covered situations where the policy holder’s fault was in whole or “in part” the cause of the damage or injury.

Most courts also rejected the insurance industry’s attempts to limit coverage for an additional insured to situations where the policy holder was somehow negligent. Some, however, accepted that argument. In those jurisdictions, that poses a problem for additional insureds. Here’s an example. The additional insured is alleged to have injured an employee of the policy holder. Under Workers Compensation law, the worker can’t sue his or her employer, but can sue the additional insured. In such a case, there will be no finding that the employer was negligent and, thus, no additional insured coverage for the additional insured.

Perhaps the most important aspect of liability insurance coverage is that it pays for the defense of claims even if there turns out to be no liability (so long as “if” there had been liability, the policy would have covered the claim). In those states that look for the policy holder’s “fault” and also need to see such “fault” alleged on the face of the lawsuit’s “complaint,” even if an additional insured would have coverage, it can be denied under the theory that, without “fault” on the part of the policyholder, there is no coverage. So, even if there was “fault” on the policy holder’s part, many courts are not allowed (by court policy) to look outside of the pleadings. In such a case, there will be no “legal” finding of fault and thus no coverage for the additional insured.

Still not satisfied that it had reduced its exposure to additional insureds, the insurance industry took another step in 2013. We aren’t going to repeat our words about those changes to additional insured coverage. Those interested can click: HERE to see our thoughts about the 2013 changes. Those changes are relatively new and not all of the basic “fights” have been resolved over whether the new “limitations” have gotten the insurance industry to where it wants to be.

Even those readers whose eyes have glazed over should be at a point where they understand the basic point of today’s blog posting – you can’t rely on being an additional insured. Even if you are comfortable with the current scope of such coverage, our agreements are for the long-term and the insurance industry will keep trying to reduce its exposure for claims it would like to ignore.

That brings us back to the sole point Ruminations is pushing: rely on your own coverage. Its corollary is: let’s stop arguing about insurance language if we don’t know how insurance really works, especially where all we are doing is helping an insurance company avoid paying a claim for which a premium has been paid. Every party is carrying its own policy anyway and, in a lot of cases, the “other” party is paying for that policy (or paying its proportionate share), such as is the case in leases where a tenant directly, or by implication within the rent, is paying for the landlord’s coverage.

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