Banks Improperly Requesting Extra Insured Standing – Half 2

Our pal, Christopher Boggs, Chief Advisor with Boggs Danger and Insurance coverage Consulting, returns to reply to an important remark left on his latest submit. He’ll inform you extra beneath. Blissful studying.

A number of days in the past I printed an article entitled, “Banks Ought to NOT be Asking for Extra Insured Standing.” On this article I argued that banks ought to NOT be requiring extra insured standing on the borrower’s legal responsibility coverage as a situation of the mortgage.

After a number of makes an attempt at posting this text in numerous areas I lastly obtained a response from a celebration defending a financial institution’s request to be a further insured. The response learn:

Lenders have deep pockets so are sometimes named, whether or not rightly or not, as co-defendants together with the borrower when somebody suffers harm or harm due to the borrower’s operations. This may be a difficulty significantly within the context of loans secured by actual property. As a result of the lender is at arm’s size from management, you might be proper that they shouldn’t be implicated, however typically they get dragged in anyway. Having extra insured standing helps tackle protection expense till the lender can get dismissed. The borrower might be obligated to indemnify the lender anyway, so this isn’t as misdirected as you counsel.

I’m so completely satisfied to lastly have somebody provide an opinion. Whereas I believe this can be a nice level, sadly, this opinion doesn’t provide legitimate reasoning for extra insured standing. It is a purpose with out impact.

ISO’s industrial common legal responsibility (CGL) coverage extends insured standing to a few “ranges” of insureds inside the coverage language:

• Named Insureds: Granted the broadest protection
• Prolonged Insureds: Typically these pure individuals who personal and/or run the enterprise comparable to administrators, officers and LLC managers/members.
• Computerized Insureds: These are mostly the individuals who truly do the work of and supply the providers/merchandise of the enterprise comparable to staff and volunteers.

Past these, the coverage permits for the inclusion of “extra insureds” by endorsement. Extra insureds, as acknowledged within the prior article, are these with an ongoing enterprise relationship (often created by contract) or a symbiotic relationship with the insured.

Banks, as beforehand acknowledged, maintain neither of those relationships.

However the one who responded to and commented on the prior article talked about that regardless that banks don’t have both of those relationships, they could get pulled right into a swimsuit and thus ought to be extra insureds.

Whereas it might be true {that a} lender could also be improperly pulled right into a swimsuit, this competition forgets one key ingredient of ISO’s CGL. Not solely does the CGL lengthen protection to the beforehand referenced insureds, the coverage additionally extends safety to contractual indemnitees.

Paragraph 2 in SUPPLEMENTARY PAYMENTS – COVERAGES A AND B reads:

2. If we defend an insured in opposition to a “swimsuit” and an indemnitee of the insured can be named as a celebration to the “swimsuit”, we are going to defend that indemnitee….

Standing as an indemnitee is created by the provisions of the mortgage paperwork and the inclusion of an indemnity settlement. Extra insured standing is NOT required for the financial institution to garner protection and safety from the insurance coverage provider.

If the financial institution really believes it has an publicity, such publicity ought to be managed by way of contractual threat switch and the indemnity provisions that requires the borrower to indemnify, defend and maintain the financial institution innocent within the occasion they’re pulled (even wrongly) right into a swimsuit. That is the suitable technique for the financial institution to handle this potential.

Extra insured standing ought to be restricted to ONLY these events with an ongoing enterprise/contractual relationship with the named insured or these with a symbiotic relationship. Solely these events having such a relationship with the insured have TRUE vicarious legal responsibility for the actions of the named insured.

Insurance coverage insurance policies are NOT meant to perform a aim that’s a lot better achieved by contract and contractual threat switch. Insurance coverage is just a financing mechanism; contracts and contractual threat switch is the first supply for managing and transferring threat. The unendorsed CGL helps the correct use of contractual threat switch.

To this point, nobody has provided a viable purpose a financial institution ought to be granted extra insured standing as a requirement for a mortgage. However I’m nonetheless keen on opinions.