In today's business world, a company often is asked (or required) to put another entity on its commercial general liability coverage form as an additional insured. This is usually done by attaching an endorsement to the CGL form, adding the other entity as an insured. The endorsement can be a standard form—for example, the Insurance Services Office (ISO) CG 20 15, additional insured – vendors endorsement; or, the endorsement can be a manuscript form, such as one adding gray yak breeders in Tibet as additional insureds. The endorsement can be simple, like the two-sentence CG 20 02, additional insured – club members; or more complicated, like the two-page CG 20 09, additional insured – owners, lessees, or contractors. (For more information on specific additional insured endorsements, see CGL Endorsements.

But regardless of the length or format of an additional insured endorsement, an insured should realize that a decision to make some entity an additional insured on his or her general liability policy should not be dismissed as just a simple business decision that has no real consequences; there can be legal and financial consequences arising from that decision. After all, the insured is sharing his or her liability insurance with another entity, and is more often than not paying the insurer to extend that insurance to apply to sums that the additional insured becomes legally obligated to pay as damages.

As noted, if an insured adds another entity as an additional insured onto a general liability policy, this is usually done through an endorsement. Some of these endorsements can be attached to the named insured's CGL form at no additional charge; others result in additional premium for the named insured.

Some ISO endorsements that can be added to a general liability policy at no additional charge to the insured are: CG 20 07 additional insured—engineers, architects, or surveyors; CG 20 22 additional insured—church members, officers, and volunteer workers; and CG 20 21 additional insured—volunteer workers. Those additional insured endorsements that require a premium charge include: CG 20 34 additional insured—lessor of leased equipment; CG 20 15 additional insured—vendors; and the omnibus CG 20 26 additional insured—designated person or organization. The charges for the latter endorsements are on a “refer to company” basis.

Named insureds under a CGL form should also take note that the limits of insurance paid out for claims are shared with additional insureds. For example, if the general aggregate limit on a named insured's CGL policy is $500,000, that is the most the insurer will pay regardless of the existence of additional insureds on the policy. And, any losses paid on behalf of an additional insured will decrease the aggregate amount available to the named insured.

In connection with this point, named insureds need to know that experience modification factors that may lower or increase the policy premium can be affected by the losses and claims of the additional insureds. If the named insured has a spotless loss history, but the insurer has paid out tens of thousands of dollars for claims against an additional insured, chances are that the premium for which the named insured is responsible will be higher at the next renewal date.

Premiums and sums paid as damages are not the only areas under a CGL form where named insureds and additional insureds relate. The CGL forms consider the named insured (using the terms “you” and “yours”) and (additional) insureds as connected, but yet distinct entities. Both are covered by insuring agreements and both are touched by exclusions and conditions. Note, however, that there are parts of the CGL form that apply only to the named insured, and parts that apply to all insureds, including additional insureds. For example, when an insuring agreement or an exclusion or a condition or definition uses the word “you” or “your”, only the named insured is the affected party, not the additional insured. Another example is the medical payments coverage—it applies only for the named insured, not additional insureds.

Finally, while the CGL policy of the named insured will provide liability coverage for an additional insured, the CGL policy will not act as a guarantor for the named insured's adding the additional insured onto the policy. If the named insured is required, or volunteers, to list a party as an additional insured on the named insured's CGL form, but then does not follow through with the listing, the CGL form will not just automatically provide coverage for the additional insured. Further, the provisions of the CGL form will give no coverage to the named insured if the jilted additional insured should sue for that lack of follow through; this is a breach of a contractual agreement—either written or verbal—and the CGL form does not apply to the upholding of performance agreements.

If the insurer is going to provide liability coverage for an additional insured through an endorsement to a CGL form, the insurer must also live up to the duty to defend. After all, the insurer states that it has “the right and duty to defend the insured against any suit seeking … damages”. This statement obviously includes an additional insured within its scope. However, the duty to defend is limited by the declaration that “we will have no duty to defend the insured against any suit seeking damages … to which this insurance does not apply”. So, for example, if an exclusion on the CGL form clearly applies to the named insured and the additional insured, there is no duty to defend on the part of the insurer. A problem arises, though, when it is not clear whether the additional insured has liability insurance, and this lack of clarity more often than not springs from the wording on the additional insured endorsement.

Many additional insured endorsements make the designated entity an insured “but only with respect to liability arising out of ….” Just what does “arising out of” mean?

Some insurers would read the phrase very narrowly, limiting an additional insured's role as an insured only to vicarious liability—that is, no coverage for any negligence of the additional insured that is independent of the activities of the named insured. Put another way, the liability of the additional insured flows only from the liability of the named insured. Others would say “arising out of” deserves a broader interpretation—so broad that the additional insured's own activities could lead to liability coverage under the named insured's CGL form. Put another way, if the activities of the additional insured (instead of the named insured) cause injury to someone, the named insured's CGL form will apply to a claim as long as there is some connection between the additional insured's activities and the named insured's operations or premises.

As usual in such circumstances, the courts will provide the definitive interpretation on a case by case basis. Note that, at this time, most courts are not buying the more narrow vicarious liability only argument. Following are some examples of the judicial viewpoints.

In Shell Oil Company v. AC&S, Inc., 649 N.E.2d 946 (1995), an Illinois appeals court was faced with interpreting the “arising out of” phrase and chose the broad viewpoint. In the case, Shell Oil had filed a declaratory judgment action to see if the defendant and its insurers had a duty to defend in a lawsuit by an employee of AC&S for injuries sustained while working on Shell's premises. The lower court sided with Shell and the appeals court agreed. The appeals court said that the “key language for determining potential coverage and the duty to defend is the phrase 'arising out of', and it means originating from, having its origin in, growing out of, or flowing from. The injuries arose from operations of AC&S on Shell's premises, and the injuries would not have occurred but for the employment and presence of the injured worker on Shell's premises.”

In Hormel Foods Corporation v. Northbrook Property and Casualty Insurance Company, 938 F. Supp. 555 (1996), the U.S. district court in Minnesota looked over an additional insured endorsement and offered a compelling argument in favor of the broad interpretation of the “arising out of” phrase. In that case, Hormel sued in a declaratory judgment action over the duty to defend due to a death at a hog processing plant, and the resultant lawsuit. Hormel was added as an additional insured on the general liability policy of Quality Pork Products (QPP) for liability “arising out of the ownership, maintenance, and use of” leased premises. When someone was killed by a machine on the premises and Hormel was sued, Hormel sought protection from the liability policy of QPP. QPP's insurer, Northbrook, denied coverage and said the additional insured provision only protects Hormel from negligence by QPP, that is, vicarious liability. The district court disagreed and said “if there is a causal relationship between the place covered by insurance and acts giving rise to legal liability, the liability is covered. The machine was so intimately and necessarily intertwined with the operations as to make the injuries flowing from it attributable to the ownership, maintenance, or use of the facility”.

On the other hand, in Harbor Insurance Company v. Lewis, 562 F. Supp. 800 (1983), the Federal court for the eastern district of Pennsylvania wrote that “by providing additional insured endorsements, the insurer is only insuring additional insureds against vicarious liability for acts of the named insured”. However, note that this decision was clarified in Philadelphia Electric Company v. Nationwide Mutual Insurance Company, 721 F. Supp. 740 (1989) when that same court stated that ” the Harbor case did not articulate a rule of law limiting the interest of additional insureds to vicarious liability”. What the Harbor case did show was that contract language—the words and phrases on the additional insured endorsement—was crucial in interpreting the extent of coverage for an additional insured. In other words, if an insurer wants to limit coverage for an additional insured to vicarious liability only, that intent has to be written into the endorsement (as was done in the Harbor case); otherwise, the additional insured endorsement giving coverage to an additional insured for injuries “ arising out of” the ownership of a premises or the operations performed by an insured will be seen as extending beyond mere vicarious liability to include liability for the negligence of the additional insured itself (as long as there is some causal connection between the claimed injuries and that negligence).

One issue that often arises with the presence of additional insureds is the relevance of certificates of insurance.

Sometimes, the additional insured may receive only a certificate of insurance showing that it has been named as an additional insured on the named insured's policy. That certificate may show some policy numbers and the name of an insurance company, but it is no guarantee that the additional insured has the coverage it wishes or requires. So, the additional insured should insist on a certificate of insurance and a copy of the policy and the additional insured endorsement, and then read and compare the certificate with the policy and endorsement.

A certificate of insurance will list the policy period. However, this will not help the additional insured if the named insured cancels the policy or has it cancelled through nonpayment of premium. Cancellation notice goes to the first named insured and not the additional insured. So, the additional insured needs some mechanism beyond a certificate of insurance to assure itself that actual coverage exists when it is needed.

The wording on a certificate of insurance may contradict the wording or the intent of the insurance policy. The terms of the policy should prevail over those on a certificate; but for this to be the case, the insurer has to make it clear to the additional insured that the certificate is not an insurance policy, and that any coverage granted is done so through the policy and the additional insured endorsement. If this is not clear and unambiguous, a case could be made that the language on the certificate gives the additional insured more coverage than the insurer had intended. As an example of this, see International Ampitheatre Company v. Vanguard Underwriters Insurance Company, 532 N.E.2d 493 (1988). In that case, an Illinois appeals court found terms on a certificate of insurance ambiguous in relation to just what the policy covered and what it excluded, and so the insurer ended up covering a claim it had intended to exclude. For an example of a court's opinion as to what constitutes unambiguous wording on a certificate of insurance, see Pekin Insurance Company v. American Country Insurance Company, 572 N.E.2d 1112 (1991). The wording on the certificate of insurance in that case was as follows: “This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend, or alter the coverage afforded by the policies below. The insurance afforded by the policies described herein is subject to all the terms, exclusions, and conditions of such policies.” The court in the Pekin case said that this was a clear showing that the certificate was not part of the policy and conveyed no rights to the certificate holder.

Another issue that can arise with additional insureds concerns the other insurance clause that is on the CGL forms, with its question of primary insurance versus excess insurance. When an entity is named as an additional insured on someone's general liability policy, is that policy primary or excess insurance for the additional insured? The terms of the other insurance clause in the CGL form have to be reviewed for an answer to the primary/excess question.

Language in the other insurance clause of the standard CGL form starts off with “if other valid and collectible insurance is available to the insured”. So, the discussion of whether the general liability insurance is primary or excess is based on the assumption that there is other valid and collectible insurance; in other words, the additional insured has his or her own general liability policy as well as the other general liability policy on which he or she has been named as an additional insured.

Assuming this point, the other insurance clause then states that “this insurance is primary except when b. (excess insurance paragraph) applies”. The excess insurance paragraph lists several specific examples of when “this insurance” is excess; for a description of these examples, see General Provisions of the CGL. However, the example that is most relevant to an additional insured states that “this insurance is excess over any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement”. In other words, the additional insured's own general liability policy is declaring it is excess coverage over that general liability policy on which he or she has been listed as an additional insured. Note that this particular paragraph is new to the CGL form, having been added to the most recent version of the form, dated 07/98. Being that new, the paragraph has yet to be tested in a court. However, it can be said at this time that, if both the additional insured's CGL form and the other insured's CGL form have that paragraph in the other insurance clause, then the additional insured endorsement has made the additional insured a primary insured on the liability policy to which the endorsement has been attached; the additional insured's own CGL form is excess coverage.