Author: Chris Boggs
Following a liability loss, the first question asked by any claims adjuster is, or should be, "Is the person or entity that caused the injury or damage an insured?" If the answer is, "No," there is no need to go any further. When insured status does not extend to the person or entity, it does not matter how well the policy was constructed, there is no coverage.
Insured status granted within the commercial general liability (CGL) policy, the business auto coverage (BAC) form and the workers' compensation (WC) policy is the focus of this article. Each coverage form approaches insured status differently.
CGL policies allow coverage for up to four "levels" of insureds, while the BAC extends protection to only three "levels," but can be endorsed to include a fourth "level." And WC is a world unto itself, covering only one "level" of insured.
CGL forms extend, or potentially extend, coverage to:
- The "You" (Named Insured);
- Extended insureds;
- Automatic insureds; and
- Additional Insureds.
The BAC extends protection to:
- The "You" (Named Insured);
- Other Insureds (by endorsement);
- Permitted drivers – with several exceptions; and
- Those with vicarious liability for the actions of an insured.
In workers' compensation, the named insured is the only insured. No other entities or persons are covered unless specific endorsements are attached.
Proper Listing of the Named Insured
Before jumping into the levels of insured status granted in each policy type, one important fact MUST be understood – the Named Insured (the "You") must be correct in regard to:
- The entity's legal name; and
- The entity's legal entity type.
Importance of the Correct Legal Name
If the incorrect name is listed, there may not be coverage. Although this seems like an overstatement (or even a "duh!" statement), it's not. Remember, an insurance policy is a legal contract between two named entities, the named insured and the insurance carrier.
When one entity is listed incorrectly or improperly, there is no contract. Although the carrier may consider intent and reform the contract, no agent should depend upon such action. List the entity type exactly as it is listed with the secretary of state or in any other legal documents. If the insured is listed multiple ways in various documents, go with the secretary of state; all the other documents should be corrected by the insured. Never use an improper or non-existent name just to satisfy a contract.
Importance of Correct Legal Entity Type
Coverage grants in all three policy forms key on or respond based on who is listed as the named insured, the "you." Entity type in the CGL dictates which individuals are granted extended insured status (and thus protection). The BAC's "You" is the entity that either owns, hires or borrows the vehicle. And in WC, who counts as and is protected as an employee as well as who is excluded from coverage is a function of the entity type.
Use the wrong entity type (LLC rather than corporation, or partnership rather and LLC) and coverage may not extend to the correct individuals. This errors and omissions (E&O) loss is easy to avoid. Confirm the correct entity type is used.
Insureds in the CGL
Of the four levels of insureds, it is always best to be "you." No, this is not philosophical, just reality. The "You," or named insured" is given the broadest protection granted by the policy. After all, the "You" is who the policy is designed to cover.
There can be multiple "Yous" in the policy. When multiple named insureds exist, each "You" is treated as if it is the only "You" when analyzing coverage. Essentially each "You" has its own policy – except for the limits of coverage (which are shared). What this means is that it is possible that a loss may be excluded for one named insured, but covered for another named insured. (Note: This separation of insureds provision applies to all four "levels" of insured.)
Listing multiple "Yous" may be subject to specific underwriting guidelines based on ownership and the mixing of entity types.
Several different entity types are specifically listed in the CGL:
- Joint Ventures
- Limited Liability Company
- Organization other than a partnership, joint venture, or LLC (i.e. corporations, etc.)
Specific rules apply regarding how each entity type should be listed; this is detailed later in this paper. Further, the entity type chosen dictates who is granted coverage as an "extended insured."
"Limited" and Temporary "Yous"
This is out of order when compared to the policy, but there exists limited and temporary coverage for newly acquired or formed entities – new "Yous." Coverage granted to these entities is equivalent to the coverage granted to the "You" (which is why these are covered here) with four limitations:
- Automatic coverage is limited to 90 days. After this point, there is no coverage unless they newly formed or acquired entity is specifically named in the policy;
- The named insured must own a majority interest;
- There is no coverage for any occurrences prior to the acquisition of the entity; and
- The automatic extension does not apply to newly acquired or formed partnerships, joint ventures or LLCs. These are entities an insured cannot own, thus they do not meet requirement #2). For coverage to exist, these entities must be named.
Extended insureds are specifically listed in the policy and differ based on the entity type, which is one reason the entity type must be correct. Further, these individuals are granted the same level of protection as the "You" (named insured). The CGL's extended insureds are:
|If the Insured is a…||The extended insureds are:|
|Individual||A spouse (not a defined term)|
|Partnership||Each partner and their spouses|
|Joint Venture||Varies based on the formation of the JV. Each person/spouse or member|
|Limited Liability Company||Members and managers|
|Other Organizations||"Executive officers," directors and stockholders (for vicarious liability)|
Notice, as has been alluded to several times, extended insureds are generally natural persons.
One important coverage limitation relative to extended insureds; the individuals are only extended insured status in respect to their actions related to the conduct of the business. Coverage exists only when the person is doing something on behalf of the business.
The "You" is the business and the extended insureds are the individuals who run the business; but other personnel are needed to accomplish business goals. These individuals are covered as "automatic insureds."
Automatic insureds are part of the insured's "family." Basically, the named insured needs these individuals (and sometimes businesses) to conduct operations and accomplish the company's goals. Automatic insureds are sometimes subject to exclusions not applicable to the named insured or extended insureds. Consequences for the actions of an automatic insured can fall on the named insured (called vicarious liability), so even if there is no coverage for the automatic insured, coverage might still be available to cover the named insured's vicarious liability.
Automatic insureds found in the CGL include:
- Employees and volunteer workers;
- Real estate managers (could be an individual or a corporation);
- Any person or organization having temporary custody of property if the "You" dies (only until a legal representative is appointed); and
- The appointed legal representative if the "You" dies. Once appointed, the legal representative is given all the rights and coverages of the named insured.
Notice, one party is missing from this list – temporary workers. There is no coverage for a temporary worker because the temp agency is responsible for extending protection for injury or damage caused by the worker. The named insured is protected for its vicarious liability for the actions of the temp, but the temp is not covered by the CGL. (In this context, a temporary worker is a worker furnished by another direct employer – the temp agency. If the employer directly hires an individual for a short period, that is not a temporary worker in the policy.)
Specifically Excluded Entities
Within the CGL's "Who is an Insured" wording, there are three entity types that are specifically excluded unless named in the declarations. No coverage is extended to unnamed current or past partnerships; joint ventures; or LLCs.
This exclusionary wording has caused some debate in relation to additional insureds; specifically, the assertion that there is no coverage for additional insureds added by endorsement that are either a partnership, joint venture or LLC. Suffice it to say, for now, this is an over-reading, and, in my opinion, misinterpretation of the form for three key reasons: 1) the clear reading of the exclusion when compared to the activities of the additional insured does not preclude coverage; 2) adding an endorsement changes the form; and 3) the most often quoted court case in support of this belief, Bott v. Shea, involved the misnaming of the additional insured as the reason coverage was excluded, not because the additional insured was a joint venture.
Additional insureds provide benefit to or receive benefit from the named insured but are NOT "related" to the named insured. Additional insureds generally do not participate in the named insured's operations because they are not part of the insured's business, thus protection is always extended by endorsement.
Because this is a business relationship rather than a "familial" one, additional insureds are often extended very limited protection. However, some named insured/additional insured relationships do create the need to extend the additional insured coverage equal to that provided to automatic insureds.
ISO offers 32 additional insured endorsements to meet the specific needs of various business relationships.
Insureds in the BAC
Like the CGL, the BAC extends coverage to the "You." But unlike the CGL, there is no difference in the breadth of coverage extended to the "You" and other insureds protected by the policy. Plus, there are no entity types listed, nor is there a list of "extended" insureds.
The "You" in the BAC is insured "for any covered 'auto.'" Whether a vehicle is a covered "auto" is a function of the coverage symbol used.
Interestingly, the policy's "You" will likely never drive a covered vehicle. In fact, unless the "You" is an individual (sole proprietor), the named "You" can never drive a vehicle. Thus, protection extended to the "You" is essentially limited to vicarious liability for the actions of a "permitted user."
Unlike the CGL, the BAC can be endorsed to extend coverage to other insureds. This is not to be confused with the concept of "additional insureds" because these endorsed persons and entities are extended coverage for their own actions. However, the relationship between the other insured and the "You" dictate whether the BAC coverage is primary or excess.
A few of the more common endorsements extending insured status to others includes:
- CA 20 54 – Employee Hired Autos: This endorsement extends insured status to employees who rent cars in their personal names rather than the business name when rented to conduct operations for the named insured. Coverage is extended to the employee on a primary basis. This endorsement also affects physical damage coverage making the rented vehicle a covered vehicle under physical damage protection. This endorsement does not alter any of the Insured Status exclusions detailed in the Permitted Users section that follows.
- CA 99 16 – Hired Autos Specified as Covered Autos You Own: This endorsement extends coverage to the described auto leased by the "You," and it specifically adds as an insured to the policy the owner of the hired/leased vehicle. Protection from the BAC is primary when this endorsement is attached. Strict underwriting is necessary before using this endorsement.
- CA 99 17 – Individual Named Insured: As the name suggests, this endorsement is used when the insured entity is an individual (sole proprietor). In simplest terms this endorsement makes the BAC somewhat equivalent to the PAP and extends insured status to include the named individual's spouse and "family members." Protection is provided on a primary basis.
- CA 99 33 – Employees as Insureds: When an employee is using his/her personally owned auto on company business, the unendorsed BAC specifically excludes coverage for that employee. When this endorsement is attached, the BAC extends protection to the employee while using his/her personal auto on company business. However, the BAC is excess over the employee's PAP. In fact, the employee's PAP covers him/her and the employer on a primary basis.
- CA 99 47 – Employee as Lessor: One method used by many corporate officers to "get around" the rates and regulations surrounding the PAP is to lease a personally-owned vehicle back to the corporation (generally because their 16-year-old, lead footed son is costing them quite a bit). When this is done a lease agreement between the owner and the corporation is created making the corporation the owner of the vehicle and responsible for insuring the vehicle. Once the lease is in place, the CA 99 47 is attached. This endorsement makes the listed auto and "owned" auto and the vehicle's owner becomes an insured in the policy. Coverage is provided on a primary basis for the owner. Strict guidelines should be followed if a lease back is contemplated.
BAC protection is almost exclusively for the benefit of the permitted users as these are likely the only individuals driving the covered vehicles. As stated earlier, a "You" (unless it's an individual) will never drive the vehicle. This explains why coverage for permitted users is essentially equivalent to the protection extended to the named insured. Yes, a few exclusions apply to a permitted user that may not apply to the "You" (i.e. the Fellow Employee exclusion), but otherwise there is little difference in protection.
Permitted users include anyone from corporate officers, to employees, to nonemployees. There is almost no limit on who could be extended protection as a permitted user; the only requirement is that the driver have permission from the named insured (express or implied) to drive the vehicle.
However (isn't there always a however), some owners and drivers of covered autos (based on the Coverage Symbol used) are specifically excluded. The policy specifically excludes:
- The owner of a hired or borrowed auto (cured with CA 99 16 or CA 99 47 depending on the situation);
- The person or entity from whom an auto is borrowed (if other than the owner) (removed by CA 99 16);
- The employee if he/she or a family member owns the vehicle (removed by attaching the CA 99 33);
- A person using a covered auto in an auto-related business, unless the business is the named insured's;
- Anyone outside the business while moving property to or from a covered auto; and
- The partner or member (LLC) if the vehicle is owned by that person (altered by CA 99 33 if these individuals are considered employees – which they generally are).
The named insured is protected for its vicarious liability for the actions of these excluded persons even though these persons are excluded.
Other Entities with Vicarious Liability
The last extension of insured status grants vicarious liability protection to any party liable for the conduct of a previously described "insured." A few examples might include:
- An upper tier/upstream contractor is held vicariously liable for an auto accident caused by a lower tier/downstream contractor;
- A restaurant is held vicariously liable for injury caused by a contract (not employees of the restaurant) delivery service; and
- A business is help vicariously liable for an accident caused by a delivery service.
Note, this extension of insured status applies only if the other entity is somehow shown to be vicariously liable for the actions of an insured. If no liability can be assigned to the outside entity, the policy does not extend protection.
Although this language is already in the BAC, some outside entities want to be added as additional insureds and see their name specifically protected. For this reason, ISO introduced the most ridiculously useless form known to man – CA 20 48 – Designated Insured for Covered Autos Liability Coverage. Essentially, the form names the party desiring to see their name in lights, but goes on the state that the named party isn't getting any coverage beyond what they already had under the Who is an Insured section of the BAC. Funny what lawyers do to us.
THE Insured in WC
Unlike the CGL and the BAC, the workers' compensation policy only has one "level" of insured – the named insured/employer. Workers' compensation allows the named insured to meet its statutory obligations of providing a source of recovery if a worker, for whom the insured is responsible, is injured in the course and scope of employment.
In effect, workers' compensation is a "closed system." The only three parties allowed into the system are known up front: 1) the or an employer/insured; 2) the insurance carrier; and 3) the workers for whom the insured is statutorily responsible. No one else is allowed into the circle.
The ONLY responsible party is the insured (the employer), thus there is no need for any other level of insured. Statute makes the employer responsible for certain worker injuries, therefore there is no need to protect any other person or entity.
Some relationships or exposures may require the attachment of an endorsement adding to the list of "employers," but no level below that of an employer is covered. Two examples of these types of endorsements are the:
- Alternate Employer Endorsement: Designed to extend coverage from the direct employer's policy to a secondary employer when there is dual employment such as a borrowed servant situation; and
- Labor Contractor Endorsement: Attached to the leasing employer's policy to extend coverage to the leased employees and protect the lessor as the secondary employer.
Properly Extending Insured Status
One more question must be answered, what is the proper way to list a named insured? The answer depends on the entity type.
|If the Insured is a…||…the name on the declarations should read:|
|Individual||The full legal name of the individual. |
The answer depends on the existence of and information in the partnership agreement:
- If a partnership name is found in the partnership agreement, that is the named insured; but
- If there is no name provided in the agreement or there is no agreement, the named insured is the last names of the individuals making up the partnership.
|Joint Venture||The name of the JV as found in the written agreement.|
|Limited Liability Company||The name filed with the regulatory authority.|
|Other Organizations||Exactly as listed by the Secretary of State or other regulatory authority. |
|Trust||The name found on the declaration of trust. |
Details, Details, Details
In this short article the basics of insured status has been presented. Each part has subparts and sub-subparts; to detail all issues would require many more pages.
The VU recently presented a webinar entitled, "Are You Insuring ALL the Right People?" All the information in this article is covered in the webinar in much greater detail. A transcript of the webinar is also available. The recorded webinar and transcript allow you to have a ready reference on the topic of insured status whenever you need it.
Take some time to learn more about this topic. It may save you from an E&O issue.
Last Updated: June 27, 2017