Additional Insured-Why is it important for your municipality to be added as an additional insured to a vendors liability policy?
We are frequently asked to review the insurance requirements in contracts that Municipalities are about to enter into. These contracts range from large construction contracts to simple rental agreements, but most contain requirements that ask for one party to be added to the other party’s Liability Policy, either as an Additional Insured or an Additional Named Insured. In many instances, we find that a Municipality is being asked to add a Vendor (such as a Contractor, Sub-contractor or Lessee etc.) to the Municipality Liability Policy, as an Additional Insured, when it should possibly be the reverse. So, we will quickly review a number of issues related to this topic, including why it is important for your Municipality to be added as an Additional Insured to a Vendor’s Liability Policy in many – but not all – cases, who should be added to whose policy, as well as the importance of keeping documentation of such.
WHY BE ADDED AS AN ADDITIONAL INSURED?
When one party is added as an Additional Insured to another party’s Liability Policy, the intention is that the latter policy would become the primary policy should an action be brought against them for negligence. For instance, if a Municipality is entering into a contract with a Contractor or Sub-contractor to perform work for the Municipality for compensation, then the contract should contain a clause that requires the Contractor or Sub-contractor to add the Municipality to their Liability policy as an Additional Insured. That way, should an action be brought against the Municipality for negligence on the part of the Contractor or Sub-contractor while performing work on behalf of the Municipality (as set out in the contract), it would be the intent that the Contractor’s policy may become the primary policy and that this should respond firstly should the Municipality also be named in the suit under Joint and Several Liability (since this prevents the Municipality’s own policy from being called upon).
Joint and Several Liability exists in Alberta to make certain that innocent victims get their full compensation. Should a third party suffer a loss, be it property damage or personal injury, they could thus sue both the Contractor/Sub-contractor and the Municipality. If the Municipality is found even 1 per cent liable they could - under certain circumstances - be on the hook for 100 per cent of the loss, at which point the Municipality would then have to go after the Contractor/Sub-contractor for their proportionate share. The mention of the Municipality as an Additional Insured under the Contractor’s Policy should avoid this costly and complicated exercise/process.
WHO SHOULD BE ADDED TO WHOSE LIABILITY POLICY?
If a Municipality is entering into either a formal or informal agreement with a Vendor, and is compensating the Vendor for this product or service, it is both prudent and reasonable to expect that Vendor to carry Liability insurance with a limit that is acceptable to the Municipality, and to receive proof of such insurance. We find that a Vendor will often try to reverse this, whereby the Municipality is being asked to add the Vendor as an Additional Insured to the Municipality’s Liability Policy. In many cases this is because the contract wording is provided by the Vendor.
THE IMPORTANCE OF RECEIVING AND KEEPING DOCUMENTATION
The Municipality should always request that they be provided with a Certificate of Insurance that will be issued by either, the Vendor’s Insurance Company, or their insurance broker. A Certificate of Insurance states who the Insurer is, gives the name of the Insured, shows the liability limit, deductible, policy number, expiry date and will state in some manner that the Municipality has been added to said policy with respect to the Vendor’s operations on behalf of the Municipality.
The reason that it is important to get a Certificate of Insurance and to keep the Certificate of Insurance is due to the potential ‘long-tail’ nature of Liability claims. It can take up to two years after damage or injury has been discovered before a claim has to be filed, so several years may pass between the original negligence act and an action being pursued. Should an action later be brought against the Municipality for the Vendor’s negligence while performing work on behalf of the Municipality years earlier, if say the Vendor is no longer in business, it may be impossible to find out who the Contractor/Sub-contractor’s Insurer was without a Certificate of Insurance evidencing who was on risk at the time of the original incident. In such a case, it will then fall back to the Municipality’s Insurance Policy to respond, which will affect the Municipality’s claims history.
In most cases a very general rule of thumb to follow, might be if the Municipality is paying a Vendor for a product or service, then the Municipality should be added to the Vendor’s Liability Policy as an Additional Insured and get a Certificate of Insurance evidencing such, not the other way around.
We do note that there will be instances where the Municipality may feel that it is in their best interest to add the Vendor as an Additional insured to the Municipality’s Liability Policy.
In addition we recommend that it is a good practice for a Municipality to contact their legal counsel, for their input as well.
We are here to assist you in any way possible so should you wish to review the insurance requirements of any contracts that you may be entering into, or review a Certificate of Insurance, please do not hesitate to forward them to us for review.
Please feel free to contact our office if you have any questions.
John Hackwell, FCIP, CRM
Risk Management Advisor
AAMDC / Jubilee Insurance Agencies