John Doe and three partners purchased a building
for $100,000. Each partner had an equal $25,000 ownership. Mr. Doe took out
a property policy to insure the building, and his name appears as sole named
insured. No other interests are identified in the policy. The building burns,
fire is an insured peril, and the loss is considered total.
& Stanovich Risk Managers, LLC
The insurance adjuster agrees the value of the loss is $100,000. Mr. Doe
receives a $25,000 settlement check from the insurer. Whether the policy limit
was $25,000 or $100,000, has Doe received an equitable settlement from the insurer?
Yes, as his insurable interest in the building was $25,000: 25 percent of $100,000.
What about the three other partners? Unless each was a named insured in this
property policy, there would be no coverage for them. While they did have an
insurable interest in the building, their interests were not identified—only
John Doe appeared as a named insured. Could this situation happen? Yes.
Many risk management professionals spend considerable time on coverage comparison
and premium negotiation but spend insufficient time understanding the appropriate
interests to be insured in a property policy. Since Doe had insured the building
for $100,000, he and his partners may attempt to convince the insurer to correct
the policy and add the other interests after the loss. The insurer may take
the position that it underwrites not only the pre-loss exposure characteristics
of the building (i.e., construction, occupancy, protection) but the moral character
of the owners as well. An attempt to reform the policy after loss is an arduous, expensive task
and one ripe for failure. In this example, let's assume the three partners are
left uninsured due to lack of named insured status. How did this happen? Mr.
Doe and partners forgot to think of the "who" when building insurance was first
Exposure identification is the cornerstone of the risk management process.
A flaw in this first step of the property risk management process may result
in mistakes on how to appropriately manage the risk through use of risk control
or risk transfer including the use of insurance. Direct damage exposure analysis
must begin with not just "what can happen" but equally important "who can it
happen to." When the "who" of a direct damage exposure is understood, then the
analysis of indirect damage (i.e., loss of business income and increased operational
expense) can be conducted. Sometimes, the "who" may not be obvious to the risk
management professional when damage or destruction is thought of only in terms
of owned building and contents.
Property insurance, whether building or contents, begins with insurable interest.
An individual or entity needs to demonstrate insurable interest at time of loss to receive the benefit of
property insurance. What is insurable interest? To paraphrase a definition found
in Oran's Dictionary of the Law (3d ed.):
insurable interest is a person's or entity's real financial interest in an object;
the interest being the fact the person or entity will suffer financially if
the insured object is damaged or destroyed. Insurable interest needs to be established
not just by meeting this definition but in the majority of U.S. states, "insurable
interest" is specifically defined by statute. Insurable interest is not limited to simply an ownership interest.
There are several ways insurable interest can be established when one does not
own the object to be subject to insurance.
An insured is the written identity in the policy of the person or entity
that has an insurable interest in the object subject to insurance. An insured
may have an insurable interest in all buildings and contents covered by a property
insurance policy or it may be a specified object, such as a leased machine.
While an insured is typically thought of in terms of being the owner of the
object, it can include a person or entity that does not own the object but is
legally responsible for it such as found in many tenant/landlord and bailment
A bailment is when a person or entity (the bailee) does not own an object
but is responsible for damage to or destruction of the object while it is in
his custody. The bailee's responsibility for the object creates the bailee's
insurable interest, such as in the following common bailment situations: dry
cleaner, repair shop, or an outside processor used by an unrelated manufacturer.
An insured can include a person or entity with an insurable interest in a nonowned
object if damage to or destruction of the object will cause consequential financial damages to the insured. This consequential or contingent exposure can be thought of
in terms of a manufacturer that purchases critical components from an unrelated
supplier: the manufacturer's assembly process will stop if the supplier is unable
to ship components critical to final assembly of the manufacturer's product
if damage (insured peril) occurs to the supplier's building or contents. The
lack of incoming supplies will result in a business interruption loss to the
manufacturer even though it did not suffer the direct damage to either building
or contents. The manufacturer has suffered a contingent business interruption
Is a named insured and an additional insured the same thing? Essentially,
but one must read the policy to determine if either term is actually defined
in the policy. A "named insured" is the person or entity identified as such
in the policy declarations or supplemental declarations if there is more than
one named insured. A named insured will have the broadest insurable interest
in covered property and business interruption coverage and is the person or
entity that purchases the policy and pays the premium.
What is an additional insured in property insurance? An additional insured
may be unrelated to the named insured and may appear as a person or entity that
has a specific insurable interest in a specific insured object, building, or
contents, such as "ACME Leasing Company as additional insured as respects copier
equipment." A named insured and additional insured will have insurable interests
in the same object but for different reasons.
ABC Manufacturing Company is a named insured in a property policy and leases
a copier from ACME Leasing Company. By contract with ACME, ABC will be held
responsible for any damage to the copier. ACME owns the object and thus has
an obvious insurable interest.
While ACME could carry property insurance on this object for itself as a
named insured, it may find that it is easier and less expensive to have its
insurable interest insured in ABC's policy as an additional insured. An additional
insured must be as diligent in properly insuring its insurable interest as if it was the named insured itself. The additional
insured must be concerned about more than just its name appearing as "additional
Is there be a difference in policy treatment of a "named insured" and "additional
insured" in a property policy"? Yes, but one has to read the policy to determine
if the difference is in coverage, in administration of the policy or both. Let's
look to Insurance Services Office, Inc. (ISO), "Common Policy Conditions" form,
IL 00 17 11 98, to answer this question. Similar verbiage may be used by other
insurers when their property policy is not an ISO-filed form.
The policy conditions in IL 00 17 11 98 state that the insurer makes the
first named insured agent for all other insureds for policy administrative issues:
cancellation, policy changes, and premiums. The first named insured can cancel
the policy and make any coverage change to the policy with only the consent
of the insurer. While the named insured may have a contractual responsibility
to procure a minimum level of coverage for the additional insured, this contract
is only between these two parties—it does not create an obligation for the insurer.
The "Common Policy Conditions" is only between the insurer and named insured.
The "Common Policy Conditions" allows the first named insured great latitude
in his actions for administration of the policy that can affect coverage for
all other insureds in the policy. There is clearly an advantage to being the
first named insured. Each additional insured in the policy must make sure that
its interests are correctly identified. Can an additional insured obtain some
protection from the named insured and insurer that its interests will be protected?
An additional insured is a loss payee as respects its insurable interest
in the object subject to policy coverage. Even without being specified as a
loss payee, it is understood that the additional insured has this status if
an object of its insurable interest is damaged or destroyed. The additional
insured can require that not only its identity will be added to the policy as
an "additional insured," but its status as loss payee will be demonstrated through
an endorsement such as ISO form "Loss Payable Provisions" (CP 12 18 06 95).
This form provides certain rights to the loss payee that may not have been provided
if its interest was simply identified as an additional insured. The loss payee
needs to protect its rights for settlement and payment of claim, continue coverage
for its interests if the policy is void at time of loss due to act of the named
insured (arson), and to receive advance written notice of the insurer's intent
of policy cancellation.
But, even with use of this endorsement, the additional insured may not have
the same rights as the named insured. The named insured can still elect to cancel
the policy or make changes in coverage, and the insurer is not obligated to
provide advance notice to the loss payee of either the impending cancellation
or change in coverage. The additional insured must require advance notice of
cancellation or change in coverage in its contract with the named insured and
then follow up to ensure that the named insured has had the insurer make the
The name insured obtains a benefit as well when the additional insured defines
its specific insurable interest in the policy. By specifying the extent and
location of the insurable interest, the named insured limits the potential for
the loss payee to be added as a party to all claims settlement. Sometimes an
additional insured is added to a property insurance policy, and the interest
is shown simply as "as their interests may appear" (ATIMA). This approach may
lead to a situation where, in a total loss, the additional insured appears on
the overall claims settlement while its interest is simply a piece of insured
contents, such as a photocopy machine.
A more efficient claims settlement process for the named insured and additional
insured is to have one check made out to these two parties strictly for the
cost of the copier, not everything that is damaged or destroyed. The named insured
must review its policy at least annually and remove any additional insured that
no longer has an insurable interest in any objects that remain insured in the
named insured's policy. This type of policy due diligence will limit the possibility
of erroneous insureds to be considered during the claims settlement process.
When a building is used as collateral for a loan, the mortgagee as holder
of the mortgage has an insurable interest in the building. This insurable interest
should be obvious: damage to or destruction of the building will cause a decrease
in the value of the collateral. It is normal to have a property policy endorsed
to identify a mortgagee and protect its rights through an appropriate mortgagee
Sometimes a mortgagee will not only want its status as mortgagee identified
as respects the building pledged as collateral but will also require loss payee
status as respects the business income coverage. This is a puzzling request
as it is not clear that a mortgagee has an insurable interest beyond the building
itself and may not be entitled to be a loss payee for business income coverage.
This position is best summarized by statement attributed to Robert J. Brennan
and Laura C. Company, in Business Income Insurance
Coverage, 32-SUM Brief 65, 66 (2003):
A claimant seeking business interruption coverage must have an insurable interest
in the business in question. Merely possessing an interest in the property,
such as that possessed by a mortgagee, is insufficient to create an insurable
interest in the business for which coverage is sought.
Claims settlement can become problematic since the mortgagee will appear
as a payee on all business income settlement checks. Any request by a mortgagee
to be included as loss payee for business income coverage should be reviewed
by appropriate legal counsel prior to loan closing.
Many risk management professionals seek to broaden the named insureds in
a policy through an omnibus clause as a means to safeguard overlooking an entity
to be included for coverage. The omnibus clause, when properly structured, is
an acceptable way of extending policy coverage to many insureds without identifying
each by specific name. But coverage for each insured within the omnibus clause
will only apply to the extent that other terms and conditions of coverage apply
to such person or entity. A broadly worded omnibus clause will not help provide
coverage if a location is overlooked and not scheduled in the policy. It is
equally important that when the "who" is considered, the "where" is considered
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