Richard Ejzak | Cohen & Gigsby | August 24, 2018
Who is entitled to coverage under an insurance policy? The question is simple, but the answer sometimes is not. Obviously, any company that the policy identifies as a “Named Insured” is covered, as are companies and individuals that the policy specifically identifies as insureds, either by name or by their connection to the named insured (such as subsidiary companies, shareholders or officers/directors of the named insured).
But what about companies that are not identified in the policy? For example, a subcontractor might have to extend coverage under its policy to a general contractor or owner as a condition for obtaining work. Or a tenant might have to add a landlord to its policy under the terms of a lease. In those situations, the subcontractor or tenant can extend coverage to additional parties by obtaining an endorsement from the insurer. If drafted properly, the endorsement should eliminate or at least minimize any uncertainty about the coverage the additional party will receive under the policy.
The picture is less clear if there is not an endorsement specifically naming a party as an additional insured. Liability policies frequently contain two provisions – the definition of the “Insured” and the so-called vendor endorsement – that can extend coverage automatically to parties unrelated to the policyholder under certain circumstances.
Definition of the “Insured”
When defining who is an “Insured,” liability policies often include any company for whom the policyholder has agreed by contract to provide coverage. Because such a provision relies on the terms of a contract between the policyholder and an unrelated third party, it is extremely helpful if the contract clearly identifies the limits and scope of coverage that is to be provided. Courts have enforced contracts that include such terms.
When a contract requires a party to provide insurance for another party (as in the subcontractor/general contractor or tenant/landlord scenarios mentioned above), the contract also might require the party to provide a certificate of insurance to the other party. Many certificates expressly state that they are issued as a matter of information only and do not confer any rights on the holder. Notwithstanding this disclaimer, the coverage available to a party who holds a certificate of insurance depends on the language in the certificate, the facts of the case and the jurisdiction in which the case is pending.
Contracts that require a policyholder to provide insurance coverage for another party also commonly require the policyholder to indemnify the other party. It is important for the parties to consider whether they want to synchronize the two requirements so that the duty to indemnify is coextensive with the duty to provide coverage. For example, if the contract limits the duty to indemnify to liabilities arising solely from the conduct of the policyholder, the parties might (or might not) want the contract to impose the same limit on the insurance coverage the policyholder must provide to the other party.
Vendor Endorsement
The vendor endorsement typically amends the policy definition of “insured” to include distributors or wholesalers of a manufacturer. Where a manufacturer’s liability policy includes a vendor endorsement, a vendor might be entitled to coverage under the policy even if the manufacturer is not contractually required to provide insurance for the vendor. Because coverage can apply automatically to vendors without the insurer’s knowledge, the vendor endorsement usually contains language that purports to limit the coverage available to the vendor. For example, a standard vendor endorsement states that coverage does not apply to bodily injury or property damage arising out of changes the vendor makes to the condition of the manufacturer’s product.
The existence and scope of insurance coverage can dramatically alter the fortunes of policyholders and the companies with whom they interact either through contract or by virtue of vendor relationships. For that reason, it is important to be aware of insurance provisions that can automatically extend coverage to parties who are not named in the policy.