Understanding Named Insureds on a Policy

The Issue

An insured client’s subsidiary was named in a lawsuit alleging housing discrimination. That particular entity was not specifically listed as an additional insured on the Liability policy. The underwriter previously advised in writing that an underlying entity didn’t need to be named on the policy because it was wholly owned by the insured organization and would qualify as an additional insured per the policy language.

However, when a suit came in, the claim was denied. The insured had formed a subsidiary (an investment company) with named individuals as the owners, not the insured organization. Complicating matters was the fact that the investment company was owned by a related investment company LLC owned by the insured organization. The entity named in the lawsuit was twice removed from the named insured. The carrier declined coverage, stating that the subsidiary did not meet the definition in the policy since it was not at least 50% owned by the insured.

The carrier issued the Liability policy with defined terms. “Subsidiary” was defined in the policy as:

• Any corporate in which and so long as the Named Entity owns or controls, directly or indirectly, more than 50% of the outstanding securities representing the right to vote for the election of the board of directors of such Corporation.
• Any limited liability company in which and so long as the Named Entity owns or controls, directly or indirectly, the right to elect, appoint or designate more than 50% of such entity’s managing members.
• A controlled partnership.
• A Corporation operated as a joint venture in which and so long as the Named Entity owns or controls, directly or indirectly, exactly 50% of the issued and outstanding voting stock and which, pursuant to a written agreement with the owner(s) of the remaining issued and outstanding voting stock of such corporation, the Named Entity solely controls the management and operation of such corporation.
• A foundation, charitable trust, political action committee, or any IRS 501c(3) organization in which and so long as such entity or organization is controlled by the Named Entity or any Subsidiary as defined in the policy.
• An argument was presented to the carrier that, according to the policy language, a newly created entity only needed to be reported if the fair value assets of the created entity exceed 35% of the total assets of the Named Entity as reflected in their most recent consolidated financial statements prior to the acquisition or creation.

The carrier pushed back, stating the investment company was not owned by the insured entity nor did the insured entity control, directly or indirectly, the right to elect, appoint or designate for that 50% of the subsidiary’s managing members and therefore would not be considered an additional insured.

Because the entity being sued was owned by two individuals, and that entity was owned by a holding company owned by the named insured, the lines were blurred, creating a coverage gap that could not be overcome.

Named Insureds on a policy are different from Additional Insureds on a policy. A Named Insured is actually listed on the declarations page specifically; an Additional Insured is endorsed on to the policy. When a complaint or suit comes in, the adjuster will confirm how the policy is written and will make its  coverage decision based on this.

Another area that can lead to coverage issues is a company that also has a “doing business as” or DBA name. If the Corporation is named one way on the corporate documents yet the business operates under a different name, the DBA name should be endorsed onto the policy.

If a suit comes in with the DBA name and that DBA name is not endorsed on the policy, the carrier could decline coverage stating that the DBA is not a named insured. An Additional Insured does not own the policy. The policy only extends protection to the Named Insured under terms and conditions that apply.

Named Insured vs. Additional Named Insured

A Named Insured owns the policy. An Additional Named Insured is a person or party that has been added as a “co-owner” and is afforded all the coverages available under the policy. Unlike an Additional Insured who doesn’t have the same responsibilities of a Named Insured, an Additional Named Insured would have the same rights and responsibilities under the policy as the actual Named Insured.

LLC vs. Inc. – Does it Matter?

Technically, yes it does matter. If an entity is incorrectly listed on a policy as an LLC vs. an Inc., the carrier could disclaim coverage because the named insured doesn’t match what is on the policy. Even though the exposure to the carrier doesn’t change, the adjuster will look to the policy and apply it accordingly. It is important to pay attention to details when completing an application for insurance to avoid a denied claim.