May 27, 2011
Beware of Additional Insured Provisions in Contracts. Many contractors and small business owners are forced to sign these agreement for the right to do business or otherwise they are denied the right to provide that service unless they refuse to agree to an additional insured endorsement.
The problem with additional insured endorsements is that they unfairly shift the burden to you. Typically these are large multinational corporations, which require these provisions. Often these provisions occur in construction contracts, motor carrier access agreements, and sub-contracting agreements.
Additional insured provisions usually have a provision somewhat like this: you the service provider agree to name the other party as an additional insured. The contract usually placed no limitations on the coverage to be provided and requires that your insurance be primary and non-contributory.
The biggest risk of agreeing to these provisions is twofold: (1) You assume an unfair burden of risk; namely because in certain situation you may be agreeing to insure the other party for their negligent act, and (2) You may lose your defense. Under most insurance policies, suits against other insured are not covered as part of your policy. Thus, you lose your right under your policy for legal defense against the additional insured. This loss of coverage hold even if the additional insured was negligent.
Therefore, I generally advise clients to always strike these provision whenever possible. In addition several states have begun enacting law prohibiting the additional insured requirements.