Who Wants To Be an Insured?
December 2000
It is common for businesses to involve multiple
corporate, partnership, and joint venture entities, and there are a number of
subtle nuances that can effect how insurance coverage applies to these entities.
Care must be taken to identify them and assure that insured status is properly
provided under CGL policies. Learn how in this insightful article.
by Richard
G. Rudolph
Seaver Rudolph and Associates
Who wants to be an insured? Is it: (a) the named insured; (b) all related
entities; (c) unnamed entities and individuals; or (d) anyone who needs coverage?
In the real world, you might have a lifeline, but probably only one. Choosing
the incorrect answer may put you out of the game and even in front of Judge
Judy.
In this article, we will examine some of the subtleties of nominating entities
and individuals as insured persons on casualty policies and how common practices
can be improved to become best practices.
The Named Insured
The first step in correctly addressing the question of who wants to be an
insured begins with the named insured description on the policy. The easy and
obvious answer is to list specifically the named entity and any other entities
the prospective insured identifies as needing insured status. This is a simple
solution when there is a short list of entities and when the entities have a
natural hierarchy, such as a holding company and a few wholly owned subsidiaries.
It becomes increasingly complex when the prospective insureds consist of a mixture
of types of organizations having interrelated ownership of varying degrees and
unrelated ownership.
The standard policy extends certain traditional rights to the named insured,
primarily the right to coverage (including damages and defense), the right to
change the policy, the right to cancel the policy, the right to receive any
return premium, and the right to receive notice of cancellation or nonrenewal
or material change. Also, the policy imposes several duties, particularly the
duty to pay the premium and to file claims and proof of loss, to submit to oral
examination, and to perform other claims-related duties. Generally, these rights
and duties are extended only to the first named insured (if such language exists
in the conditions) or to the named insured first listed. One thing to consider
with such policies is whether the first entity named on the list is the appropriate
entity for a given right or duty. When the organizational structure is complex,
this may not be the case.
The conventional approach to nominating the named insured would be to list
each entity by name in a schedule that expands the named insured declaration.
This specific scheduling addresses the primary need for answering the question
"Who wants to be an insured?" but it creates additional issues and fails to
maximize coverage that might be required. One glaring problem left unaddressed
is the treatment of newly formed entities. The standard coverage extension for
newly formed entities is temporary, with a time limit within which the insurer
must be informed. Further, another provision states there is no coverage, including
coverage under this newly formed entity extension, for partnerships or joint
ventures not specifically named on the policy.
Several decades ago, the practice of endorsing an omnibus named insured provision
to the policy became relatively commonplace. In the language of the typical
omnibus named insured wording, every known entity, subsidiary, and affiliated
or associated entity as exist, as existed in the past, or as may be constituted
in the future were added. This approach solved the clerical difficulty of listing
dozens of entities, but did not address the issue of specifically listing partnerships
or joint ventures—past, present, or future—and did not clarify which entity
had which particular traditional right or duty.
In keeping with the "belt and suspenders" approach favored by many cautious
insurance professionals, both a specific listing of known entities and the omnibus
wording to handle newly formed or newly forgotten entities has become common
today.
Regardless of which approach is used, a second endorsement must be added
to the policy stating exactly which entity has a specific right or duty and
with respect to what activity or location, and stating that newly formed partnerships
or joint ventures are automatically covered for at least a minimum time period
pending a report to the underwriter. Past entities that were partnerships and
joint ventures must also be added by endorsement.
Even this action does not maximize coverage and completely answer the question
"Who wants to be an insured?" Most standard casualty policies contain a provision
in the Who Is an Insured (or similarly titled section) which describes who is
an insured by referring to an item in the declarations identifying the entity
listed as the named insured as a proprietor or individual, a partnership, or
a corporation. If the entity is a proprietor, individual, or partnership, the
individual or partners and their spouses are covered with respect to the scope
of their duties. If the entity is a corporation, its stockholders, directors,
and officers are covered with respect to their ownership or their corporate
duties. Many policies now include limited liability companies and their members
in this expansion of coverage. Employees acting within the scope of their duties
as such are covered for most situations.
However, when the specific listing of entities or the omnibus named insured
wording described above are used, rarely are the listed entities described as
respects their type of formation, and in the case of the omnibus wording, no
type of formation is described. Thus, the extension of insured status to stockholders,
directors, officers, members, partners, or proprietors who are not directly
associated with the first named entity is uncertain. A strict reading of the
policy language by a hard-nosed claims adjuster might result in a declination
of coverage based on the simple fact that the specific entity involved in the
claim was listed by name only, but since its organizational form was not specified
in the declarations, no extension of coverage under the Who Is An Insured clause
would be activated. While an insured would probably prevail in a declaratory
action, the uncertainty of the result and the certainty of a delay are unacceptable.
Including the type of organizational structure with each entity listed on
the named insured extension schedule can easily solve this problem, but it is
less easily solved in the case of the omnibus wording. To address this, another
endorsement stating that the type of organization declaration is deemed to apply
to whatever entity is covered by the omnibus wording and the Who Is An Insured
provision is extended as if the entity were specifically named and its type
of organizational formation declared.
Conclusion
It is common for businesses to involve multiple corporate, partnership, and
joint venture entities, and there are a number of subtle nuances that can effect
how coverage applies to these entities. Care must be taken to identify them
and assure that insured status is properly provided under commercial general
liability (CGL) policies.
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