Many businesses shift risk by requiring others with whom they do business – e.g., vendors, subcontractors, suppliers, and others – to procure insurance on their behalf by making the business an “additional insured” under the other person’s liability insurance policy. Unfortunately, insurance companies sometimes treat these additional insureds as second-class citizens, refusing to acknowledge that the additional insured has the same rights as the policyholder, who paid the premium. In Philadelphia Indemnity Insurance Company v. SMG Holdings, a California appellate court removes any doubt whether these additional insureds are third-party beneficiaries entitled to the same rights – and bound by the same duties – as the entity that bought the policy.
While the dispute at issue in SMG Holdings was a narrow one – i.e., whether the additional insured was bound by the policy’s arbitration clause – the implications of its holding are far ranging in ways that, in some instances, may benefit the additional insured. For example, because the additional insured is an intended beneficiary under the policy, neither the insurer nor the policyholder may do anything to impair the additional insured’s rights under the policy; if they do, they may be liable for tortiously interfering with the additional insured’s contract rights. This means that (again, by way of example) if the insurer attempts to rescind, or cancel, or amend the policy in a way that impairs the additional insured’s rights, the additional insured may have recourse. It also means that if the policyholder does something untoward that jeopardizes the additional insured’s rights under the policy, the policyholder may be liable to the additional insured for any resulting harm.
SMG Holdings also reminds us that – subject to the terms and conditions of the policy – additional insureds are entitled to the same benefits as is the named insured. For example, an insurer may not, as insurers have been known to do, refuse to fully defend (or defend at all) its additional insured against a third-party claim when it is, at the same time, fully defending its named insured.
Of course, all of this is a two-way street: These same principles may, in certain instances, benefit the insurer in a dispute with its additional insured. But we won’t elaborate here, because that would be giving aid and comfort to the enemy.
What is important to businesses facing risks arising out of relationships with their business partners is that additional-insured coverage under policies issued to those partners is a valuable risk-shifting tool that should not be neglected.