Everyone understands that the fundamental concept of buying insurance is to protect one’s own financial interests. What is not well understood is that our legal relationships with others create obligations to protect their financial interests as well. When we assure that those legal obligations are taken care of, we secure our own financial well-being.
Once this abstract discussion is reduced to everyday terms, the concept does not seem so strange. These are relationships of great importance to individuals and businesses in their everyday lives and activities and one’s insurance decisions are interwoven with these relationships. These relationships can include:
mortgage lenders on your home;
lenders on your auto loan;
lenders on other items, whether as lenders or lessors on contracts for business equipment; and,
persons with whom you have contracted to sell goods or to provide goods and services, who require that they be named as additional persons insured under your policies.
MORTGAGES OR TRUST DEED HOLDERS
If you live in the eastern states, you recognize the former concept—mortgage.n If you live in the western states, where there is a different legal usage, you recognize that the lender on your home is a holder of your trust deedas the security interest on your home loan. Either way, the fundamental concept is the same. You, the named insured under your homeowners policy, have a home loan. You want to insure your interest in your home. Your home loan lender, which holds a security interest in your home to the extent of the unpaid loan balance, wants you to assure that you insure your home so as to protect its security interest. Not only that, your lender requiresthat you do so and that you cause it to be named an additional insured in the loan documents of your home loan.
It is very important for you to make sure that your homeowners insurer:
is always timely and promptly informed of who your home loan lender is, what their appropriate address is,and what your loan number is;
shows your home loan lender on your policy as an additional insured to the extent of its interest in your property; and,
supplies your home loan lender with evidence that they are an insured every yearat the time your homeowners policy is renewed.
Most homeowners insurers are pretty good about assuring that your home loan lender receives evidence of insurance on renewal each year. That does not, however, mean that you do not need to make sure that they do. It is possible for your insurer to become confused as to who your current mortgage lenders are that need to be shown as additional insured interests on your policy, particularly when many individuals are refinancing their home loans at frequent intervals or are taking out second mortgages or home equity lines of credit. There can be potential adverse consequences to you if your home loan lender does not receive evidence of insurance each year at your policy’s renewal. These potential adverse consequences to you make your attention to assuring that this detail is attended to each year necessary.
If your lender does not receive timely evidence that its security interest is not insured, your loan documents permit your lender to place insurance—solely to protect its interests at your expense—through its own master insurance program. It can also charge the costs—not just the premiums, but also the administrative costs—to your loan.
This is something you do not want to happen. First, you are only digging yourself in deeper with respect to the amount of your outstanding loan balance.
Second, the insurer with which your home loan lender places such forcedcoverageis often an affiliate or a subsidiary of the lender. Do you think that the premiums charged by such an insurer are going to be competitive with the premiums you could obtain in the marketplace with respect to your own policy? Think again. They have an inherent profit motive and conflict of interest, but one that your contract with your lender—and the law—supports. They have no reason to charge a competitive premium for such force-placed coverage.
Third, the terms of coverage are limited and favor only the lender. You get something only if they have managed to insure for a sum greater than the amount of the outstanding loan balance—something that rarely happens. Your home loan lender does not have an insurable interest in your property in an amount greater than the amount of its outstanding loan balance.
Fourth, these forced placementpolicies do not cover your personal property (i.e.,your contents). In the event of a loss, you are on your own.
Fifth, defaulting on your obligation to insure your property and failure to have your home loan lender named an additional insured on your homeowners policy to the extent of its interest can be reported as a breach of your obligation under your home loan. This can result in a negative (and serious) credit report that can affect your ability to obtain other credit.
If you are a homeowner, and have a first, second, or third home loan, mortgage, home equity line of credit, or any other credit facility that is secured by your house, condominium, or farm, you need to make certain that your lenders’ security interests are protected by appropriate endorsements to your policy. You need to make sure that your insurer knows of the existence of all of these interests, the address of each of the lenders in question, the loan number, and the need to make sure that all secured parties receive annual evidence:
of the fact that you continue to maintain property insurance on the property in which they have an interest;
that the amount of the insurance you maintain is sufficient to protect its interests (i.e.,the total amount of outstanding loans); and,
that each such secured party is an insured under your policy.
AUTO LESSORS AND LENDERS
Regardless of where in the United States you live, if you are leasing a car or a truck or are making payments on a vehicle purchase loan, the leasing company or auto loan finance company will include as a contract provision the requirement that they be shown as an insured party on your automobile policy. Your auto lease or loan contract may even specify the minimum coverages you are obligated to maintain (typically collision and comprehensive coverages).
The lease or auto loan contracts often give the lessor or lender the right to place coverage to protect their interest in the event of loss (but not your interest) and to charge you for the cost of such coverage. This will happen unless you make sure that your auto insurer provides evidence of coverage at each policy renewal.
Usually, notifying your insurer is done at the time the lease or loan documents are signed. Many automobile dealers will not release a vehicle to a customer until the dealers have confirmation that your insurer has been informed of your lease or purchase of a new vehicle. It is often a dealership’s finance department that undertakes this notification, based on information supplied by the customer.
However, it is usually a better practice for you to call your insurance agent and personally provide him or her with the new vehicle purchase or lease information. It is better to take the responsibility to handle the notification yourself and to make sure it is done right.
Even if you do not have all the information needed (such as the correct legal name of the lender or its address), you can at least tell your agent the name of the dealership, its telephone number, and the name of the correct person at the dealership to contact in order to obtain the financing and additional insured information necessary. This will guarantee that the auto leasing company or automobile finance company is properly included as an insured party under your automobile policy.
If you are trading in a vehicle as part of the transaction or if you have sold it in a private party transaction, you will need to call your agent to advise him or her of that change to the policy. Also, if you pay off any outstanding loan balance, then you will need to notify your agent that the prior lender should be deleted from your policy.When in doubt, more notice to your agent (i.e.,both from you and from the auto lender) can never hurt. It is only a failure to give notice or complete and accurate information to your agent that can lead to trouble.
OTHER SECURED PARTIES
As individuals, your mortgage (including home equity lender) and auto lenders are the most common entities you will need to assure are added as insureds under your insurance policies. If, however, you run a business and have policies for your business, you may encounter circumstances in which you need to add other persons or companies to coverage as insureds under your policies.
ADDITIONAL INSURED INTERESTSUNDER LIABILITY COVERAGES
The preceding sections deal with additional insured interests under policies covering items of real and personal property. There are circumstances, usually limited to commercial policies, in which a policyholder may need to add another person or business as an additional insured under the policies’ liability coverages. Common situations in which this can occur include a wide variety of circumstances.
Construction contractors may be obligated under contracts with property owners for whom the contractors are performing services to add the owner as an additional insured under the contractors’ policy for liability arising out of the contractor’s work for the owner. Similarly, construction subcontractors may be contractually obligated to add the developer or general contractor they are performing services for as an additional insured for liability arising out of the subcontractor’s work.
Persons who lease business premises may be obligated to add the owner of the premises as an additional insured for liability arising out of the use and occupancy of the premises pursuant to the lease.
Churches and charitable organizations may obtain additional insured endorsements extending coverage to officers, trustees, board or vestry members, or volunteers in other roles, while they are acting in their respective capacities for the church’s or organization’s activities.
There is a wide variety of standard form additional insured endorsements, including, in some cases, more than one form that may apply to a particular situation. If an inappropriate version of such an additional insured endorsement is obtained, the person or company to whom you owe the obligation to procure additional insured status may not receive the expected coverage. It could result in that person or company turning to you personally for the costs of the defense in the event of lawsuit or for paying a claim in the event of a loss that would have been covered if the correct form of additional insured endorsement had been employed.
It is beyond the scope of this book to detail all the different types of additional insured endorsements available or to detail when a particular form of additional insured endorsement is more appropriate than another in a given circumstance. In order to help ensure that you obtain the correct additional insured coverage for your particular circumstances, it is important that you provide as much information as possible to your agent or broker. This may include copies of your leases or contracts with parties who require additional insured status under your policy. This will help to assure that the correct or most appropriate additional insured endorsement is added to your policy and that the person or other company added as an additional insured is correctly specified. It is also important to specify the activities for which additional insured status is sought so the additional insured is not receiving coverage that is broader than that required by the terms of the lease or contract in question.
Finally, for some persons or entities that are receiving coverage as additional insureds under the policies of another person or company, it is necessary that they inform their own agent or broker of that fact, so that he or she can take appropriate steps to coordinate the coverages. Specifically, if a person or company is an additional insured under the policy of another, the insured may want that additional insurance to apply to claims or lawsuits as primary insurance. In those situations, it would want the coverage of its own policy to apply only as excess coverage, that is, only after exhaustion of its coverage as an additional insured under the other party’s policy.
