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.
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.
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.
Edward A. Schirick, C.P.C.U., C.I.C., C.R.M., is president of Schirick Associates Insurance Brokers in Rock Hill, New York, where he specializes in providing risk management advice and in arranging insurance coverage for camps. Schirick
is a chartered property casualty underwriter and a certified insurance counselor. He can be reached at 845-794-3113.
Originally published in the 2004 Fall issue of The CampLine.