by Edward A. Schirick, C.P.C.U., C.I.C., C.R.M.
The Big Picture
An important step in the risk management process includes risk financing.
The most common risk financing technique camps use is buying insurance.
The insurance premium is the cost of financing the risks covered by the
insurance policy. The insurance company accepting the premium presents
a contract (the policy) in which they lay out the types of risks they
will assume, the terms and conditions under which they will assume them,
and when and how they will make payments for these obligations.
The contract (policy) is a bi-lateral (two-party) agreement between
the person or organization buying the insurance, usually the Named Insured
listed first on the policy, and the insurance company. Insurance representatives
(agents and brokers) are not parties to these contracts. They typically
act as intermediaries, and advisors bringing the buyer (the Named Insured)
and the seller (the insurance company) together.
Who is Covered?
Besides the Named Insured and the insurance company, there are other
persons and organizations that may become insured under the contract (policy)
in certain circumstances. Adding other entities as Additional Insured
to a liability insurance policy is very common. In fact, the request to
be added as an Additional Insured to someone’s policy has become
so routine, the status is often offered by Named Insured(s) and provided
by insurance companies with very little analysis, or thought. Sometimes
the request is appropriate. Problems develop when the request is not proper.
Before we can explore the use and misuse of Additional Insured status,
we need to gather some perspective about who is insured by a typical,
standard, camp general liability insurance policy. To determine who is
protected by a liability insurance policy, we must examine the first page
of the policy. This first page is called the Declarations Page. At the
top of the first page, under the name of the insurance company is space
to list the Named Insured. The first Named Insured is the owner of the
policy, is responsible for paying the premium, and is also the entity
with the most duties and responsibilities under the policy. The names
of the other legal entities and financial interests, which follow the
Named Insured listed first, have protection from the risks covered by
the policy but don’t have the same status as the Named Insured listed
first.
Besides the Named Insured, there are others who are considered Insured(s).
Section II, “Who Is Insured,” of the standard, camp liability
insurance policy further establishes who is legally entitled to protection
under the policy. The language refers to the Declarations Page again and
qualifies that protection offered to each person or organization only
applies to the conduct of your (the Named Insured’s) business. Protection
is further limited to the scope of a person’s duties within the
context of your business.
Specifically, Section II, “Who Is Insured” contains omnibus
wording that extends Insured status to an individual owner and spouse;
a partnership, or joint venture including partners, members, and spouses;
a limited liability company, including members and managers; an organization
besides a partnership, joint venture, or limited liability company —
including executive officers and directors, but only for their duties
as such, and stockholders, but only for their liability as stockholders;
and finally, a trust, including the trustees, but only for their duties
as such. In the newest version of the general liability policy being used
by some camp underwriters, volunteer workers and employees are also included
as Insured(s).
Who Can Be Additional Insured?
The next group of Insured(s) in a liability policy is known as Additional
Insured(s). This status is usually acquired through some type of business
relationship with the Named Insured. Camps have various business relationships
in which they are providing Additional Insured status to another entity
or are receiving Additional Insured status from some other organization,
usually an independent contractor. Some of the business relationships
are so common that the insurance industry has developed a group of standardized
endorsements to make it easy to add Additional Insured interests. Some
examples of these standardized Additional Insured endorsements include
the following:
- Grantor of Franchise
- Grantor of License
- State or Political Subdivison — Permit
- Church Members and Officers
- Club Members
- Lessor of Leased Equipment
- Manager or Lessor of Premises
- Owners or other Interests From Whom Land Has Been Leased
- Users of Teams, Draft, or Saddle Animals
In addition to these specific Additional Insured endorsements, a generic
form entitled “Additional Insured — Designated Person or Organization”
is used regularly.
What Does Additional Insured Mean?
Additional Insured(s) are not parties to the insurance contract. The
Additional Insured endorsement merely adds their interest to the Named
Insured(s) policy by amending the “Who Is Insured” definition
in the policy. Each Additional Insured endorsement has limiting and qualifying
language designed to narrow the protection extended to each Additional
Insured.
For example, the newest version of the Additional Insured — Designated
Person or Organization states the “Who Is Insured” definition
is amended, but only with respect to liability for “bodily injury,”
“property damage,” “personal and advertising injury”
liability caused in whole, or in part by your (Named Insured’s)
acts, or omissions, or the acts, or omissions of those acting on your
behalf in the performance of your (camp’s) ongoing operations, or
in connection with premises owned by or rented to you (Named Insured).
In other words, your (camp’s) liability insurance policy is extended
to the Additional Insured laterally. The Additional Insured acquires limited
protection and defense coverage up to the limits in your policy for a
lawsuit alleging negligence. Your policy would pay on their behalf, as
well as yours, when your acts, or omissions, or the acts or omissions
of those acting on your behalf are the sole, or partial cause of “bodily
injury,” “property damage,” and “personal and
advertising injury” as defined in the policy. All of this protection
is subject to the terms and conditions of your policy and must be in connection
with your operations, or in connection with the premises you own or lease.
Confusion and Misuse — Giving Additional Insured
Status
Most Additional Insured requests are clear and easily handled. Sometimes
confusion develops from complex business relationships. For example, assume
an organization wants to lease your camp facilities and doesn’t
have its own insurance policy. They will bring their own staff, intend
to operate their own programs, and provide their own supervision. Your
operations are limited to providing the facilities. Under these circumstances,
requests to add their organization to your policy as Additional Insured
would be inappropriate.
Complying with such a request could jeopardize your business relationship
with your insurance company if something happens that results in a claim.
Actually in this circumstance, good risk management practice would dictate
that you not rent your facilities to anyone unless they have their own
insurance and add your camp to their policy as Additional Insured —
Lessor of the Premises.
However, let’s change the business relationship slightly. Assume
that you intend to conduct the challenge course program and provide meals
for the organization (Leasee). If your camp provides these services to
the other organization, you are in effect acting as an independent contractor.
As a result, providing limited Additional Insured status to the other
organization would be appropriate. A problem may develop however, when
the underwriter is not aware of the scope of the relationship, and the
Additional Insured status is not limited to these services.
Unintended Coverage
If the scope of an Additional Insured endorsement is not properly arranged,
unintended insurance coverage may be extended to the Additional Insured.
This could adversely affect your loss ratio and jeopardize your insurance.
Make sure you give your insurance agent or broker the details of your
relationship and the services you are performing, if any, in these business
arrangements.
Dilution of Limits of Liability
Besides unintended coverage, extension of Additional Insured status may
dilute the limits of insurance available to pay claims arising from your
own negligence. This is of greatest concern when multiple organizations
have Additional Insured status under a policy. If you provide many organizations
with Additional Insured status, consider buying umbrella or excess liability
insurance to reduce the risk of diluting the limits of liability available
for your camp.
Problems — Getting Additional Insured Status
Take a few minutes to identify all of the business relationships you
have with independent contractors who perform services for you. For example,
consider the outfitter, or guide service you might hire to conduct a white
water rafting experience for your campers.
Good risk management practice dictates that your camp should request and
receive Additional Insured status on the liability insurance policy carried
by all independent contractors, in this instance the white water guide
service. This would seem to be simple enough, except for the problems
that can develop.
Be Specific
Always put your request in writing. It is best if you actually sign a
contract with the independent contractor, which includes the Additional
Insured status requirement. Specify the minimum limit of liability acceptable
(i.e., $1,000,000 per occurrence and $2,000,000 general aggregate).
Always request a Certificate of Insurance. The Certificate lists the
name of the insurance agent, or broker, the name of the insurance company
providing liability insurance, the limits of liability, the policy number,
and policy dates, all valuable information in case something happens.
In addition, request a copy of the endorsement to the insurance policy,
which actually adds your interest as Additional Insured. Share a copy
of the Certificate and the Additional Insured endorsement with your insurance
representative. Ask them to review the documents and bring any issues
to your attention.
It is best to get this information well in advance of the summer, so
other arrangements can be made if necessary. A problem can develop necessitating
other arrangements when the independent contractor carries limits of insurance
lower than yours, is insured by a nonstandard insurer, or with a company
of questionable financial strength.
Avoid A False Sense of Security
When your camp is an Additional Insured on an independent contractor’s
liability policy, their policy responds first when someone is injured
in connection with the operations they are conducting for you.
However, there can be problems when a camp director relies entirely
on the independent contractor’s insurance for protection in connection
with the camp’s business activities. First, the insurance protection
from an Additional Insured endorsement is only as good as the quality
(reputation, financial strength) of the paper it is written on. Secondly,
it is possible that your camp could be sued in a manner that doesn’t
trigger coverage under the independent contractor’s Additional Insured
endorsement.
Under these circumstances if you don’t have your own camp liability
insurance coverage for the activity, you could be partially covered, uncovered
completely, and confronted with defending yourself out of your own pocket
until any coverage disputes can be cleared up. Don’t run this risk.
Make sure your camp liability policy includes coverage for all your camp
activities, including those performed by an independent contractor.
Valuable Risk Management Tool
Additional Insured status is a valuable risk management technique. Reflect
on how you use this tool. Determine if misuse or misunderstanding about
how Additional Insured status applies could become a source of problems
in your camp’s risk transfer plan. Take some time to identify those
organizations requiring Additional Insured status from your camp before
next summer. Make a list of the organizations’ names and addresses,
and identify reasons why they need Additional Insured status. Do the same
with the organizations that give your camp Additional Insured status.
Share these lists, supporting contracts, or letters of understanding in
connection with the business relationships with your insurance advisors.
Get your insurance representative’s advice. Finalize a review of
your existing strategy and determine if changes to your risk management
plan are appropriate under the circumstances.
Originally published in the 2004 Fall issue
of The CampLine.
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