Not Recommended for Professional Liability
It is not advisable to add a non-affiliated organization as an additional insured on an Errors & Omissions (E&O), Directors & Officers (D&O), Employment Practices Liability (EPL) or Cyber Insurance policy because adding non-affiliated organizations to these policies may result in reduced coverage.
The addition of a non-affiliated organization, such as an insured’s client, to a policy as an additional insured may be normal for standard business insurance coverages and attorneys will often incorporate a provision requiring this addition in contracts such as leases. Unfortunately, many businesses and their attorneys assume that the same requirement should apply to specialty insurance coverages such as E&O, D&O, EPL, Cyber insurance, without realizing that the addition may reduce their own protection.
This article will provide general guidance on adding (or not adding) non-affiliated entities as additional insureds to professional liability policies and will identify some of the key issues to both the insured and non-affiliated entity. However, your specific situation may be different and the comments noted may not be applicable. Throughout this article we will refer to the entity that has purchased a policy as the “insured” and the entity not affiliated with the insured but desiring to be added as an additional insured as the “non-affiliated” entity.
A request by an insured to add a non-affiliated entity as an additional insured to their general liability (GL) insurance policy is often motivated by a non-affiliated business that has a working relationship with the insured and needs to be protected from the insured’s activities. The concept is to protect the non-affiliated business from claims arising out of the operations of the insured over which, in theory, they have no control. For example, a landlord may request their tenant add them to their general liability insurance policy for protection against claims that occur in space for which the insured is responsible. Typically, these requests make sense and are granted by underwriters.
Professional liability policies are different. Professional liability policies provide protection to the insured for claims (demands, lawsuits) brought against them by third parties for negligence in providing professional services. The objective is to provide protection to the insured from claims made against them by third parties for whom the insured is performing services. The third parties benefit as well by the insured having an insurance policy in place that will respond to their claim(s) of the insured’s negligence.
From time to time, we get requests from insureds to add a non-affiliated entity as an additional insured on their E&O policy or other professional liability insurance policy. The insured’s client or client’s attorney may require that they be added as an additional insured in order to do business with the insured, often in conjunction with a contract.
It is not advisable or practical to add non-affiliated entities as additional insureds to a professional liability policy because certain types of claims will then be denied by the insurer. For example, claims made by the non-affiliated entity will be denied under the insured vs insured exclusion found in virtually all professional liability policies.
What is the insured versus insured exclusion? Insurers do not intend to provide coverage for a claim by one insured against another, and therefore professional liability policies contain a provision called an “insured versus insured” exclusion which removes coverage for these types of claims. This provision excludes claims brought by one insured, say an employee, against another insured, say the corporate entity. The following wording is an example of a typical and simple insured versus insured exclusion:
This Policy does not apply to any claim brought by any Insured against any other Insured.
Adding a non-affiliated entity to a professional liability policy will eliminate coverage for claims brought by the non-affiliated entity against the insured (and the reverse). Underwriters are generally not willing to remove the insured versus insured exclusion because they do not want to cover a claim that involves inherent conflicts among insureds, has the potential for abuse and because they could find themselves funding both sides of a lawsuit. As an example, adding a non-affiliated entity to a client insured’s E&O policy is actually not good for any of the parties:
Insured – The insured will not have any E&O insurance protection if the non-affiliated entity brings a claim against them because the claim will be denied under the insured vs insured exclusion.
Non-affiliated entity – The non-affiliated additional insured will not have the benefit of their client having E&O insurance protection if they bring a claim against the client because the claim will be denied under the insured vs insured exclusion. The non-affiliated entity should want E&O insurance to be available to the insured so they can recover damages from the insured via a claim lawsuit.
Underwriter – The underwriter does not want to be covering an insured vs insured claim situation because of conflicts and because they could be funding both sides of the lawsuit.
In some cases an additional insured request by a non-affiliated entity is more complex. The non-affiliated entity might be seeking protection from the insured’s policy for claims made by third parties against it for actions by the insured, for example when the non-affiliated entity is a sub-contractor to the insured. An example of this situation is a consultant providing expertise, as a sub-contractor to another consultant, on a project the other consultant is working on for a third-party client. A simple solution is for the sub-contractor consultant to buy their own policy and pass the cost on to the other consultant.
There is an additional factor as well. The implicit assumption is that any claim will be the result of a negligent action on the part of the insured, for which the non-affiliated entity wants protection. But that is not always the case. In certain situations, the insured’s E&O insurance policy might end up paying for a claim caused by the non-affiliated entity additional insured. This will erode the insured’s limit available for their own claims and will impact the insured’s own loss experience. Either of these scenarios could end up being expensive through reduced coverage and increased renewal premiums from the claim(s) the insured never anticipated.
Having each party maintain their own coverage and providing certificates of insurance to the other parties is the best solution. Because the certificate of insurance provides the necessary and relevant information on the insurance in force, each recipient will know what insurance is in place and when for each other party.
Please let us know if you have any questions relevant to your specific situation, and how we may be able to provide a solution for you.
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