The true cost of paying claims like those discussed above can cause costs to skyrocket in several ways. Because all insurance pays only up to a set limit, these amendments can serve to effectively reduce policy limits. If an insured’s policy limit is $1 million, and a $1.2 million claim is submitted , for which the insured is only 50% responsible, but the additional insured endorsement is primary, noncontributory, and includes a waiver of subrogation, the insured’s insurance company pays $1 million even though the insured only caused $600,000 of the claim. The insured will also have to pay the $200,000 in excess of the policy limit. In such an instance, naming the additional insured effectively reduced coverage to $600,000. In addition, the insured would have maxed out insurance coverage for the remainder of the policy year. It’s also important to keep in mind that some policies place the cost of defending a claim, including expensive attorney and expert witness fees, outside policy limits. While other policies may include the cost of defense, it makes sense that it would be more expensive to defend two parties rather than one; therefore, the cost of defending the additional insured further reduces the insured’s limits.
Additional insured endorsements can also impact the insured’s loss history, which plays a role in determining premium. “Loss history” refers to the losses paid on the policy. Losses paid for an additional insured are considered part of the client’s history, and a negative loss history can often cause premiums to rise. Even worse, a negative loss history has the potential to make it difficult for an insured to renew a policy or find needed, appropriate coverage from another carrier.
