Insurance Parlance and Contracts

March 29, 2018

Having been employed in the insurance industry for nearly twelve years now and having had the opportunity to review hundreds of contracts during that time, as part of my role, I have lost my sensitivity to seeing incorrect insurance terminology employed by those drawing up contracts. The lack of accurate insurance terminology at first, came as a surprise to me, but by now, it is routine and I am now more surprised when the proper terminology is actually employed. Moreover, after seeing a clause in a real estate contract about a year ago, requiring a tenant to carry insurance for nuclear attacks, I am no longer phased by some of the insurance requirements demanded by some parties to a contract.

Some of the more common errors in terminology that I regularly come across is incorrectly referring to commercial general liability as comprehensive liability and all too often do I see property insurance referred to as fire insurance. Some of the errors are based off of old terminology no longer in use and other errors are just that, errors without any rationale other than ignorance on the part of the person(s) who drew up the contract. I imagine some of the errors can significantly impact coverage, especially when there is a dispute of coverage between an insurer and an insured related to the contract. Nevertheless, I haven’t come across legal matters or claims that have gotten to that.

One error that I have seen impact coverage, and is a common error at that, is the confusion between “named insured” and “additional insured.” A named insured is the primary party to an insurance policy and the intended beneficiary of the coverage afforded by the policy. Compared to other insured parties, a named insured is afforded the broadest scope of coverage. Some policies may contain multiple named insureds if those entities have common ownership or some other form of common interest that allows for them to be combined under one policy (i.e. a property manager can purchase a policy for all properties under management even if they have different ownership). An additional insured is a party that has been added to liability coverage, usually via endorsement, with a limited scope of coverage. Additional insured status is usually afforded to a third-party that has a contractual and/or business relationship with a named insured and due to the nature of the relationship and the services provided by the parties, an extension of coverage is granted to the third-party limited in scope to the services provided relative to the relationship. Additional insured coverage is tied to the premises, work, or services that are the focus of the business relationship between the additional insured and the named insured. For instance, a general contractor granted additional insured status by a subcontractor is typically covered only for claims arising from negligent acts committed by the named insured (subcontractor) while performing work for the general contractor. To be covered, claims must generally involve negligence on the part of the named insured.

Once on the subject of contracts and additional insureds, it is of utmost importance to note that when two parties intend to create an additional insured relationship from one party to the other, such an arrangement must be spelled out in writing between the parties. Standard liability insurance policy language stipulates that additional insured status will only be granted and recognized by the insurer if there is a written agreement between the parties – the named insured and the additional insured.