Startup Risk Tips is a series of posts where we explain the finer details of insurance requirements or terms Startups will face along the road. We hope these posts will help you feel more comfortable and confident as new relationships are formed with customers, suppliers, vendors, investors, and insurance companies alike.
Q: We’re required to send an “additional insured” insurance endorsement and certificate of insurance…what’s this all about?
We’ll attack both of these common requirements with this post so that you can conquer the next big contract with ease.
1. Additional Insured Endorsements
Additional insured endorsements on an insurance policy serve the purpose of adding another entity or person to the insurance policy, effectively giving the “additional insured” coverage under the policy. This requirement is commonly seen in commercial leases, vendor agreements, service level agreements, and manufacturing agreements to name a few. If you’re running a company, you will inevitably see this requirement.
An additional insured endorsement is required because of the underlying principle of how an insurance policy works. When created, the underwriter will classify the business based on it’s operations: for example, a furniture manufacturer. When a partnership is struck between businesses, the operations of each will usually be aligned, but different. Adding the new partner as an additional insured makes sure the new partner’s operations are contemplated by the insurance policy.
In our furniture manufacturer example, a distributor or retailer that strikes a deal with the manufacturer will want to be added as an additional insured. If a manufacturing defect claim comes in against the distributor/retailer, they’ll want to make sure they manufacturer’s insurance – which is designed to contemplate those claims – kicks in to provide coverage. Another example is a landlord/tenant relationship. The landlord will want to be added to the tenant’s insurance policy because the landlord doesn’t have complete control over what goes on in the tenant’s office. If the tenant, a tech startup, decides to host a weekly yoga class for employees, the landlord doesn’t want to be on the hook for injuries arising out of that action by the tenant.
One important note: being added as an additional insured to someone else’s policy DOES NOT completely cover your company. An additional insured endorsement essentially sets the pecking order of insurance policies. In our distributer lawsuit above, the manufacturer’s coverage would kick in first, but if the claim exceeds that coverage, the distributor is exposed and has to pay out.
Bottom line: an additional insured endorsement basically extends the insured’s policy to cover other entities with which the insured company is partnered. It’s a common requirement and don’t be surprised when it pops up in a contract. Depending on the partner (landlord vs. vendor…) and industry (manufacturing vs. SaaS…), additional insured endorsements may be required pertaining to your general liability, errors and omissions, and cyber liability insurance policies. Endorsing a General Liability policy is almost always cost-free, but there may be a fee to endorse the E&O/Cyber policies.
2. Certificates of Insurance
Simply put, a certificate of insurance (“COI”) proves you actually have insurance. It’s a one page document that outlines the coverage in force, effective dates, limits of coverage, insurance carriers providing the coverage, and more. Certificates of insurance are very common because producing one is the easiest way to show that contract requirements pertaining to insurance have been met. Rather than combing through your full policies, your partners/landlord can quickly review a certificate of insurance and file it away.
Typically a certificate can be produced as soon as the insurance policy listed is in force. To speed up the COI production make sure you tell your broker 1) the full name and address of the additional insured, 2) any specific language the additional insured requires be displayed on the certificate. Your broker will usually ask to see the clause in the contract to make this process more seamless (we do!).