Understanding Pros and Cons of ‘Additional Named Insured’ Status

Q: The standard lease form that my attorney and I have used for the last several years requires a tenant to add me to its commercial general liability (CGL) policy as an “additional named insured.” But recently I have spoken with other shopping center owners about this who have said that it’s a mistake to require that. As I understand it, the additional named insured status might give me the same rights as the tenant under its CGL policy, but are there disadvantages?

A: Yes, demanding that the tenant add you as an additional named insured can backfire. First, you should understand the concept of additional named insured status. A CGL policy must have a “named insured” before including an additional named insured. Under the tenant’s CGL policy, the tenant is the named insured—that is, the person to whom the policy is issued and whose name appears on it. There can be more than one named insured—in that case, the primary named insured is called the first named insured and the others are called the “additional named insureds.” An additional named insured is usually the first named insured’s affiliate or subsidiary. The CGL policy provides coverage to a named insured and its officers, directors, stockholders, employees, partners, members, agents, and affiliates.

A named insured has many rights under the policy—including the right to amend the amount of coverage and file claims. But there are also obligations: The named insured is responsible for paying the policy’s premiums and deductibles. And the named insured is subject to any defenses that an insurer might assert against it in an effort to avoid paying a claim. So the tenant may have a hard time getting its claim paid.

Although an additional named insured has all of the rights of the named insured, it also has all of its obligations—including the obligation to pay the policy’s premiums. The additional named insured is also subject to all the defenses that the insurer might assert against the named insured. So if the insurer is successful in its defense against the named insured, the additional named insured can’t get its claim paid either.

Use Less Risky ‘Additional Insured’ Status

The solution is to revise your standard lease form to require the tenant to add you to its CGL policy as an “additional insured”—instead of an additional named insured. (An additional insured is added to a CGL policy through an endorsement.) There are many advantages to being an additional insured. For instance, as an additional insured, you:

• Won’t have any obligations under the policy, so you’re not responsible for paying the premiums;
• Can file a claim even if the named insured chooses not to;
• Aren’t subject to the defenses, conditions, and exclusions that the insurer may have against the named insured, so you can get paid in certain circumstances when the named insured can’t;
• Can require the insurer to defend you in a lawsuit concerning acts or omissions covered by the CGL policy rather than forcing you to defend yourself and then wait to get your defense costs reimbursed under the lease’s indemnification clause; and
• Won’t get sued by the insurer for reimbursement of claims payments relating to the lease or the tenant’s space (also known as a “subrogation” lawsuit).

Also, while a named insured and an additional named insured must promptly notify the insurer of any occurrence that might result in a claim (and failing to do so may invalidate their claim), an additional insured doesn’t have that notification requirement.

Be Aware of Additional Insured Drawbacks

Even so, there are a couple of drawbacks to being an additional insured. For instance, none of an additional insured’s officers, employees, partners, agents, or affiliates are automatically covered by the CGL policy. To get coverage for those parties, an additional insured would either have to carry a separate policy or require that the tenant’s CGL policy add coverage for them. An additional insured also can’t amend the CGL policy’s coverage and won’t automatically get notices regarding the cancellation of the policy. But even considering these drawbacks, being an additional insured on the tenant’s CGL policy will protect you better than being an additional named insured. The best thing you can do is to discuss the issue with your attorney to come up with a strategy that will protect you under any circumstances.