Additional Insured Endorsements: Beware!

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Many franchise agreements require that the franchisee name the franchisor as an “additional insured” on the franchisee’s liability insurance policies.  Similar requirements are included in many distribution agreements.  The purpose of this coverage is to protect the “additional insured” from claims relating to the operations of the party purchasing the policy, as well as the purchasing party itself.

It is easy to forget, however, that insurance policies are contracts that must be carefully reviewed to confirm that the insurer is obligated to provide coverage and defend a lawsuit as the parties intended.  A recent case heard by the Illinois Appellate Court illustrates the difficulties in assuring that proper additional insured protection has been obtained.

An individual suffered injuries while lighting a cigarette behind a gas station. He sued  the gas station owner and Shell Oil, which had granted a franchise to the gas station owner to use Shell Oil’s marks.  The franchise agreement required the gas station owner to name Shell Oil as an additional insured on its liability policies.

The applicable policy endorsements, however, contained limiting language.  The first endorsement applied to Shell Oil “only with respect to their liability as grantor of a franchise to you.” The second provided that Shell Oil was an additional insured, but “only with respect to liability arising out of your operations and premises owned by or rented by you.” In the end, the Illinois court found that notwithstanding their ambiguity, the endorsements created a duty for the insurer to defend Shell Oil. 

In working with clients, we increasingly see insurers claiming they cannot provide satisfactory additional insured endorsements, for a multitude of reasons. With a little persistence, however, these objections may be overcome.  A couple reminders:

  • Merely being listed as an additional insured on a certificate of insurance does not guarantee insurance coverage.  To be afforded coverage as an additional insured, a party must be named in an endorsement to the policy, and not just on a certificate of insurance.
  • The endorsement and policy should be reviewed to confirm that (a) the party is properly named in the endorsement and (b) coverage definitions and limitations do not serve to defeat the intention of the parties, which is to protect the additional insured against claims related to the operations of the franchisee or distributor.