Who wants to be an insured? Is it: (a) the named insured; (b) all related entities; (c) unnamed entities and individuals; or (d) anyone who needs coverage? In the real world, you might have a lifeline, but probably only one. Choosing the incorrect answer may put you out of the game and even in front of Judge Judy.
In this article, we will examine some of the subtleties of nominating entities and individuals as insured persons on casualty policies and how common practices can be improved to become best practices.
The Named Insured
The first step in correctly addressing the question of who wants to be an insured begins with the named insured description on the policy. The easy and obvious answer is to list specifically the named entity and any other entities the prospective insured identifies as needing insured status. This is a simple solution when there is a short list of entities and when the entities have a natural hierarchy, such as a holding company and a few wholly owned subsidiaries. It becomes increasingly complex when the prospective insureds consist of a mixture of types of organizations having interrelated ownership of varying degrees and unrelated ownership.
The standard policy extends certain traditional rights to the named insured, primarily the right to coverage (including damages and defense), the right to change the policy, the right to cancel the policy, the right to receive any return premium, and the right to receive notice of cancellation or nonrenewal or material change. Also, the policy imposes several duties, particularly the duty to pay the premium and to file claims and proof of loss, to submit to oral examination, and to perform other claims-related duties. Generally, these rights and duties are extended only to the first named insured (if such language exists in the conditions) or to the named insured first listed. One thing to consider with such policies is whether the first entity named on the list is the appropriate entity for a given right or duty. When the organizational structure is complex, this may not be the case.
The conventional approach to nominating the named insured would be to list each entity by name in a schedule that expands the named insured declaration. This specific scheduling addresses the primary need for answering the question "Who wants to be an insured?" but it creates additional issues and fails to maximize coverage that might be required. One glaring problem left unaddressed is the treatment of newly formed entities. The standard coverage extension for newly formed entities is temporary, with a time limit within which the insurer must be informed. Further, another provision states there is no coverage, including coverage under this newly formed entity extension, for partnerships or joint ventures not specifically named on the policy.
Several decades ago, the practice of endorsing an omnibus named insured provision to the policy became relatively commonplace. In the language of the typical omnibus named insured wording, every known entity, subsidiary, and affiliated or associated entity as exist, as existed in the past, or as may be constituted in the future were added. This approach solved the clerical difficulty of listing dozens of entities, but did not address the issue of specifically listing partnerships or joint ventures—past, present, or future—and did not clarify which entity had which particular traditional right or duty.
In keeping with the "belt and suspenders" approach favored by many cautious insurance professionals, both a specific listing of known entities and the omnibus wording to handle newly formed or newly forgotten entities has become common today.
Regardless of which approach is used, a second endorsement must be added to the policy stating exactly which entity has a specific right or duty and with respect to what activity or location, and stating that newly formed partnerships or joint ventures are automatically covered for at least a minimum time period pending a report to the underwriter. Past entities that were partnerships and joint ventures must also be added by endorsement.
Even this action does not maximize coverage and completely answer the question "Who wants to be an insured?" Most standard casualty policies contain a provision in the Who Is an Insured (or similarly titled section) which describes who is an insured by referring to an item in the declarations identifying the entity listed as the named insured as a proprietor or individual, a partnership, or a corporation. If the entity is a proprietor, individual, or partnership, the individual or partners and their spouses are covered with respect to the scope of their duties. If the entity is a corporation, its stockholders, directors, and officers are covered with respect to their ownership or their corporate duties. Many policies now include limited liability companies and their members in this expansion of coverage. Employees acting within the scope of their duties as such are covered for most situations.
However, when the specific listing of entities or the omnibus named insured wording described above are used, rarely are the listed entities described as respects their type of formation, and in the case of the omnibus wording, no type of formation is described. Thus, the extension of insured status to stockholders, directors, officers, members, partners, or proprietors who are not directly associated with the first named entity is uncertain. A strict reading of the policy language by a hard-nosed claims adjuster might result in a declination of coverage based on the simple fact that the specific entity involved in the claim was listed by name only, but since its organizational form was not specified in the declarations, no extension of coverage under the Who Is An Insured clause would be activated. While an insured would probably prevail in a declaratory action, the uncertainty of the result and the certainty of a delay are unacceptable.
Including the type of organizational structure with each entity listed on the named insured extension schedule can easily solve this problem, but it is less easily solved in the case of the omnibus wording. To address this, another endorsement stating that the type of organization declaration is deemed to apply to whatever entity is covered by the omnibus wording and the Who Is An Insured provision is extended as if the entity were specifically named and its type of organizational formation declared.
Conclusion
It is common for businesses to involve multiple corporate, partnership, and joint venture entities, and there are a number of subtle nuances that can effect how coverage applies to these entities. Care must be taken to identify them and assure that insured status is properly provided under commercial general liability (CGL) policies.
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