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Who Needs to be Additional Insured?

As Featured in World Aircraft Sales Magazine

Bad News:

Your engine has ingested a bird on take-off which puts your own “bird” on the ground until the engine can be repaired. Thankfully, the engine manufacturer has a loaner program. You ship them your damaged engine for repair and they ship you a loaner-engine so you can keep flying. Prior to shipping the engine they fax a contract requesting you not only to insure the engine, but also add them as additional insured under your aircraft liability policy. All seems reasonable. You sign the contract and forward a copy to your insurance broker for action.  Good move? Well, maybe or maybe not…

16If you own or operate an aircraft, you’ve probably been asked before to name another party as an additional insured under your liability policy. It may have been the governmental entity that owns the airport where you are based, the pilot training facility you use, the lessor of the aircraft, or a charter customer. Why are they asking for this, what coverage does it provide them, and what are the downsides, if any?

An additional insured is an entity that you (as the named insured and owner of the policy), either desire (or are required) to extend a certain degree of protection under your liability policy. An endorsement to your policy is necessary to implement this change. In addition, the party normally will request a certificate of insurance verifying their status as an additional insured under your policy.

Why provide others with Additional Insured status?

One reason is to protect the other party because of a close relationship with that party, such as a charter customer or business partner. Another reason is to comply with a contractual requirement to provide the additional insured status, a requirement typically found in an airport contract.

What does Additional Insured status provide?

Plainly stated, if a party is added as an additional insured to your policy, you are sharing your liability coverage with that party. For example, if you have a liability limit of $50,000,000 per occurrence, when you add an additional insured, you both share the $50,000,000 limit in the event of a claim. It does not multiply the liability coverage limit. In addition, they are provided with a legal defense.

So what are the down-sides, if any?

First, adding an additional insured dilutes your liability coverage. Consider the following example:

A charter operator has an accident involving five fatalities. The operator carries a liability coverage limit under his aircraft policy of $50,000,000 per occurrence. Prior to the flight, the charter customer, a Fortune 500 company, requested and was added as an additional insured under the charter operator’s policy. Lawsuits are brought against both the named insured (charter operator) and the additional insured (charter customer).

Due to jurisdictional issues, the suit brought against the charter customer gets placed in the court docket ahead of the suit brought against the charter operator. The case goes to trial and the court delivers a $35 million judgment against the charter customer for the wrongful death of passengers involved in the accident. Since the liability coverage is shared, the named insured (charter operator) now has only $15 million of liability coverage remaining.

A second dilemma arises if the insurer doesn’t craft the additional insured coverage wording properly. This can potentially give the additional insured far more coverage under the policy than intended. Both the named insured and insurer should fully understand the relationship between the parties so the proper additional insured coverage wording can be provided. For instance, if a flight training company requests to be named as an additional insured on the owner’s aircraft policy prior to providing pilot service, the additional insured wording should be written to reflect the exact coverage intended.

A sample additional insured clause in this situation might read: “SkyKing Training International is added as an additional insured, but only as respects their pilot training services on behalf of the named insured”. By restricting the wording, this prevents the insurer from inadvertently providing additional coverage for liability arising out of other activities of the training company.

As you can see, adding additional insureds to your policy is not usually in your best interest. However, it is a necessary evil in the everyday commerce of business. To protect yourself, be certain to closely examine every request for an additional insured with your insurance broker. Know that not all requests are warranted. Keep in mind that contracts are negotiable.

Finally, attempt to remove the requirement for additional insured status where it doesn’t make sense.

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