When underwriters think about risk, perils such as fire and theft come to mind. One risk that can be overlooked is improperly underwriting multiple named insureds. This article will discuss the importance of underwriting named insureds.
A key element on any commercial insurance policy is the named insured. A named insured can be defined as “any person, firm, organization, or any of its members specifically designated by name as an insured(s) in an insurance policy.”[i] The named insureds are listed on a policy’s declarations page. We should remember that named insured status provides full coverage under the general liability policy. Consequently, it is vital that we understand all of the operations of any named insured listed on a policy.
With just one named insured, this is simple. The underwriter assesses the named insured’s operations and then decides to either accept or decline the risk. However, with multiple named insureds, this process gets more involved. If you have more than one named insured on a policy, then we have a first named insured. The first named insured must exercise management control over all of the other named insureds on the policy. To justify adding additional named insureds to a policy, the underwriter must review the following: First, does the new named insured have an insurable interest? That is, is there an ownership interest that justifies adding this named insured to the policy? In particular, are we comfortable with the new named insured’s operations? Moreover, we need to determine if the named insureds are combinable. To be combinable, the entities should have common majority ownership. This means one named insured owns more than 50% of the other named insureds. Or more than 50% of each named insured is owned by the same majority owners. In summary, if there is a valid insurable interest for adding newly named insureds, the named insureds are combinable and the first named insured exercises management control over the other entities, an underwriter can feel comfortable adding these additional named insureds.
What is the problem if you add a named insured to a policy that doesn’t meet this criteria? It can create a conflict of interest. You could encounter what is known as cross-liability. This means one insured suing a party who is also an insured on the same policy! This can happen under the principle of severability of interests; that is, liability coverage is provided separately to each insured. In short, poor named insured underwriting can lead to a conflict of interest and litigation between different named insureds.
Named insured underwriting is a critical task. The underwriter wants to make sure the additional named insureds have an insurable interest, these entities are combinable and that the first named insured is exercising management control. Failure to do so can lead to a conflict of interest or possible litigation among the entities. In short, underwriters must always carefully underwrite their named insureds.
[i] International Risk Management Institute Glossary Of Insurance And Risk Management Terms 10th edition 2006 Page 162
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