Insurable Interest, Named Insured, Additional Insured, What, Whom, Where
Insurable Interest is not just an ownership interest:
A commercial insurance policy is tested when a loss occurs: whether a claim is rife with problems, or is verified as having an insurable interest, depends in large part on if the policy was done right in the beginning before a peril takes place, since what was erroneously omitted cannot be added retroactively. To define “insurable interest” correctly in a policy is the key for avoiding claims issues.
Insurable interest is not limited to ownership interest. In California, an ‘insurable interest’ means the insured has a direct financial interest in the preservation of the property and will suffer a financial loss resulting from the destruction of the property, AND only one named on the policy can receive protection from an insurance policy.
The Claimant and the Named Insured
The named insured needs to demonstrate insurable interest at time of loss to receive the benefit of property insurance. The claimant must be the named insured. Verify the claimant has an insurable interest is part of the claim process.
Too often, when people take out an insurance policy, they focus mainly on “what” perils can happen, but neglect “whom” can the perils happen to, other than the owner of an office building. This is particularly relevant to “indirect damage” such as increased operational expense and loss of business income.
A named insured can be someone who has leased equipment and is legally responsible for it, as in many tenant/landlord and bailment relationships.
Bailment and Insurable Interest
A bailment is when a person or entity (the bailee) does not own an object, such as equipment, but is responsible for damage to or destruction of the object while it is in his custody. Car garages leading equipment, dry cleaners, or an outside processor used by an unrelated manufacturer are bailees in this regard. The bailee’s responsibility for the object creates the bailee’s insurable interest, and a bailee can be included in an insurance policy to protect against damage to or destruction of the object/equipment that will cause consequential financial damages to the insured.
Consequential or Contingent Financial Damages to the Insured by Bailees’ Perils
If a manufacturer buys key components from an unrelated supplier, the manufacturing will stop if the supplier is unable to ship components for final assembly of the manufacturer’s product if an insured peril occurs to the supplier’s building or contents. The manufacturer has suffered a contingent business interruption loss.
Named Insured and Additional Insured
First, check the policy for definitions for either term, and for the coverage and administration.
If there is more than one “named insured”, they must be identified in the policy declarations or supplemental declarations. A named insured will have the broadest insurable interest for property and business interruption coverage, provided that the named insured person or entity pays for the premiums for the policy.
A “named insured” and “additional insured” will have insurable interests in the same object but for different reasons.
For example, XYZ Manufacturing Company is a “named insured” in a property policy and leases a drill from 123 Leasing Company. The contract between XYZ and 123 states that XYZ will be held responsible for any damage to the drill.
XYZ put 123 Leasing Company as an “additional insured” in XYZ’s policy regarding the drill. Even though 123 Leasing Company may be unrelated to the “named insured”, it has a specific insurable interest in a specific insured object, their drill.
Since the owner of the drill is 123 Leasing Company, it has an insurable interest. While 123 could carry property insurance on the drill for itself as a named insured, it may find that it is easier and less expensive to have its insurable interest insured in XYZ’s policy as an additional insured.
Endorsement for Additional Insured, Loss Payee, locations
Each additional insured in the policy must make sure that its interests are correctly identified.
Subject to policy coverage, an additional insured is a loss payee with respect to its insurable interest in the object if it is damaged or destroyed. An endorsement of a property insurance policy can specify certain rights to the loss payee for settlement and payment of claim, continue coverage for its interests if the policy is void at time of loss due to a uncovered act (such as arson) on the part of the named insured, and for receiving advance written notice of the insurer’s intent of policy cancellation.
The additional insured may not have the same rights as the named insured. The named insured can cancel or amend the policy and/or its coverage, and the insurance company has no duty to notify the loss payee of either the cancellation or change in coverage. The additional insured must require advance notice of cancellation or change in coverage in its contract with the named insured.
To include more named insured in a policy through an omnibus clause is a means to protect against accidentally omitting an entity to be included for coverage without identifying each by specific name, subject to other terms and conditions of coverage for such person or entity. A broadly worded omnibus clause will not help provide coverage if a location is overlooked and not scheduled in the policy. Not only “who”, “what”, but also “where” must be considered to secure insurance coverage.
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