Additional insured and additional interest. They sound alike but actually are quite different. These two terms often get confused. When that happens, the error can be costly. Luckily, with a little explanation, the two are easy to differentiate.
Comparing Additional Insured and Additional Interest
Let’s start with some basic definitions and how they apply to insurance coverage.
An additional insured is a third party added to the insurance policy of another entity known as the named insured. By adding the additional insured, that party now receives the same coverage as the owner of the insurance policy. The additional insured cannot alter the coverage, but it can use the policy in the event of a claim or lawsuit caused at least in part by the named insured. Adding an additional insured typically increases the premium for the named insured and carries no cost for the newly insured party.
Additional insured endorsements work to shift risk to the party most likely to cause a loss event. They typically apply to upstream parties contracting work to downstream entities.
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An entity identified as an additional interest benefits from knowing an insurance policy is in place without requiring coverage under that policy. They often have a financial interest in the property, like a bank or owner.
When listed on a policy, an additional interest receives notification when the policy is renewed, canceled, altered, or expired. They get no direct financial benefit from the policy. The additional interest status simply affords them information regarding the insurance.
Additional Interest in Action
Additional interest is common for property owners because a financial incentive exists for having tenants carry insurance. According to the National Multi Housing Council’s annual “Apartment Cost of Risk Survey,” apartment firms requiring residents to have renters insurance are on the rise. Currently, about two-thirds require coverage. Here is why:
Randy Renter wants to lease a unit from Artisan Apartments. The lease agreement requires that Randy hold renters insurance and list Big Corporation, the owner of the complex, as an additional interest. Randy complies with the agreement, shows proof of insurance, and gets the keys to his new home. Three days later, Randy cancels the policy to save some money. Big Corporation is notified and immediately lets Randy know he is in breach of the lease agreement. Randy reinstates his coverage. That following weekend he decides to barbeque on his balcony setting the roof on fire. Luckily, Randy has coverage for the damages. Otherwise, Big Corporation likely would have to cover the cost of the repairs.
When Additional Insured Falls Short
Using our scenario above, you might ask why the property owner did not require additional insured status. Receiving coverage under a named insured’s policy can create benefits, but also potential coverage gaps.
If Randy Renter or Big Corporation decide to sue each other, the insurance company must defend both parties against the other, which is not the intent of the policy or the additional insured endorsement. Plus, many courts across the country prohibit parties on the same insurance policy from suing each other.
Typical renter insurance policies contain a higher liability coverage limit for damages to third parties than for the contents of a leased unit. If the property owner is listed as an additional insured, they may not be considered a third party. Rather than benefiting from the standard $100,000 in compensation for the fire damage, Big Corporation as an additional insured only receives a portion of what Randy receives, which is equivalent to his direct losses. That does not come close to the full third-party compensation limit or what is required to repair the roof damages.
Knowing the Difference
Ask this simple question to determine if a party should be an additional insured or an additional interest: do they need direct coverage or information about a named insured’s coverage?
If the latter, adding a party as an additional interest to the policy should suffice. It does not cost any extra money and keeps all interested parties informed on the status of the insurance policy.
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