Additional Insureds For Customers: Can They Hurt or Ruin My Company?

shutterstock_58740691By Andy Mcginty and Michael Sohigian, Esq.

Shall we cut to the chase right off the bat? The answer is an unequivocal yes—Additional Insureds (AIs) can be catastrophic to a pest or lawn company. Most insureds think that getting an AI is very simple. A customer calls your office and requests a Certificate of Insurance (COI), with the customer listed as an AI. It is normally free with most insurance carriers—the agent or the carrier issues the AI and it is sent to the customer. The AI is done and forgotten, and everyone is happy.

Then there is the AI in which the customer has “special requests.” Most are routine, with requests such as a need for higher GL or auto limits, or an extra name or two added to the AI besides the customer’s name, as they are business related. Some customers request Primary and/or Non-Contributory language, which is more common these days. Again, most of these requests are routine, completed and forgotten (do you see a trend here?).

Now comes the customer who asks for a number of names to be listed as AIs on the COI. We have seen as many as 10 or more requested. An example would be an insured doing pretreats at a new subdivision. The request for the AI is to include the names of all the contractors, architects, property managers and anyone who has anything to do with the building of the area or structures.

Oh, and now there is also special wording that goes along with all the names. Wording and issues like broad form endorsement, collapse exclusions, railroad exposures, contract exclusion language, cross claim/insured exclusions… the list of what is asked by some customers is incredible. We, on behalf of the carrier, go back and forth with our agents, our insureds and sometimes the certificate holders to try and figure out what they really need and sometime ask a very big question—WHY? Some overzealous risk manager who does not know pest control from a pole vault lumps the PMP with every other vendor. Yes, it is not fair, but a number of these “decision makers” could care less. “Do what we tell you or you don’t get the business.” Sound familiar?

So let’s jump straight to the problems we are seeing with coverage and claim/suit issues.

COVERAGE ISSUES
No matter what the customer wants surrounding names on the COI or any special wording that is necessitated, the bottom line is it will not change the policy language—period. The law is clear now, thankfully, that no matter what the wording is on the COI, it cannot change the policy language in any fashion.

Of course this brings up added exposures to the agents and the insureds if the customers find out that if the insurance carrier will not provide coverage (or a defense). Rest assured, they will seek that protection, defense or reimbursement elsewhere.

Most commercial general liability policies provide AI coverage under an endorsement, which typically applies to anyone the named insured is performing operations for, if the named insured has agreed with the customer to add them as an AI on the policy. A standard endorsement might limit the AI’s coverage to liability for bodily injury, property damage or personal and advertising injury caused, in whole or in part, by the acts or omissions of the named insured or of anyone acting on the named insured’s behalf in performing the named insured’s ongoing operations for the AI.

Such an endorsement means at least two things: First, the AI is not covered under your policy if the covered damage is not the result of your negligence. Second, if something you did or didn’t do “caused” the third party’s alleged injury, even a little, under the language of the standard endorsement, the AI is covered under your policy.

It could be worse: An AI endorsement commonly attached to CGL policies, providing coverage “only with respect to liability arising out of” the named insured’s work, has been held to cover the AI even for injuries the AI directly caused. And, of course, there are all kinds of manuscript policies, written for particular insureds or circumstances.

LITIGATION EXPOSURE
I am going to provide you two examples where AIs have backfired on the PMP and cost them not only a lot of money on increased insurance costs, but also possibly their companies as they no longer can find or afford insurance for their businesses.

Mole Suit: This insured had a contract with the city to do some mole work on some land that was used by the public. They had a serious mole issue, and the insured won the bid. They were a smaller-sized company but felt they could handle the job. Of course, the city is named as an AI.

After the bid was accepted, the insured was ready to service the land and go take care of the issue. But then, the city came in immediately and told the insured that certain methods of treatment and service, including certain product(s), were not allowed. By the way, this type of control service was going to control the problem. Long story short, the insured was told by multiple city employees during this time that the service could be done using the original method, and others said no, it couldn’t.

So what happened? Someone using the property allegedly stuck his foot in a mole hole and sustained a very serious injury, causing thousands in medical bills and lost wages. The demands from the PL attorney started at $850,000. Yes, it was a big deal. So the city got sued and, of course, turned the suit over to the PMP since they were listed as an AI to be defended—the same city that told the insured what to do and what not to do surrounding treating and servicing the area in question. Due to the policy language, the city basically got away without consequence and the insured had to pay for it.

The carrier not only had to get an attorney to defend the PMP, but also needed a separate one to defend the city, especially with their actions. Coverage attorneys got involved, and before you know it, the cost of the entire claim was well over $500,000. Ready for the punch line? The entire claim went under the insured’s loss ratio. This simple little AI request turned into a nightmare for the pest professional. How many of you could withstand a claim of over $500,000 on your loss history?

Bed bug suits: These are a lot more common, especially lately. The Property Management Company (PRMGT) asks you to perform bed bug services at multi-dwelling structures. It does not matter if the bed bug work is IPM or Dry Heat—they want you to service this property. A lot of these “agreements” are for the PMP to show up after there is a problem and treat accordingly. The PRMGT asks to be an AI on the insurance policy, of course.

The pest professional explains to the PRMGT that this type of treatment will not eradicate the bed bugs unless thorough inspections and treatments are allowed at or around the same time. You already know what their responses will be: “We cannot afford to do that now.” “Oh, the infestation is not that bad.” Yeah, like they know! They’ll give any excuse to not allow the PMP to do their job as a professional to save money and time.

So what happens next? A tenant files a claim, or most likely a lawsuit, against the PRMGT for bed bug bites and damages. From what we have seen, it is rare that the pest company is named as a defendant directly by the plaintiff. It is the PRMGT that brings in our insured to the lawsuit by way of a third party. Remember that the PRMGT is listed as an AI under the policy and is allegedly entitled to a defense under the pest control’s policy.

The funny part is that almost every allegation in the lawsuit is about the actions of the PRMGT and very little to do with the pest services of the pest company. A few examples of these allegations against the PRMGT are like failure to notify tenants of current or past infestations and/or failure to treat timely when notified of an infestation. There are others, but you get the picture. Can you tell me which one of the above has anything to do with the PMP and what they did wrong?

Does it really matter? The main issue of the lawsuit is bed bugs. The insured was asked to treat the structure(s). They are the professionals. And since the PRMGT is listed as an AI, they could care less. They will be defended under our insured’s policy—or so they think. Sometimes we have told these PRMGTs to take a hike and we will take our chances—especially with property managers, etc., so bad to the tenants we know eventually we will prevail. Other times and depending on the state, we have no choice.

We currently have a suit out west in which there are multiple tenants suing the PRMGT. Our insured did nothing wrong and even had a contract stating the company was not responsible. The work looks to be solid for what the insured was allowed to do and all looks well, right? No! The PRMGT is not only demanding a defense but also their own coverage counsel since we let them know there is a coverage issue. We have three to four attorneys involved in this one lawsuit. The alleged injuries or claims are a nuisance at best—$2,500 to $5,000 per person, tops, and we feel that is judgement value at best (a total of $35,000-50,000 max). I would pay this tomorrow to save this insured. The problem is that the attorney wants over $2 million—not a lot you can do but defend.

This insured is stuck. Win or lose, this suit is going to kill his loss history, and maybe his company. All because of a simple AI request. We have been lucky. On many of our accounts that do bed bug work, we now call the insureds to let them know about this issue. We talk about this exposure and contracts to protect themselves. Almost all of the PMPs we speak to have no idea about this serious exposure and won’t until it is too late. They are now rethinking those customers that demand AIs that also prevent them from doing their professional services. The bottom line: Is this customer and AI worth it? Good luck.

Andy McGinty is the EVP/COO of LIPCA Insurance. He has been handling thousands of pest and lawn claims/suits since 1991. He helps LIPCA Insureds with loss control/documentation to protect their businesses. Andy has spoken nationwide at hundreds of conferences, CEU meetings and other pest and lawn venues. Reach him at 800-893-9887,
ext. 101, or andy.mcginty@lipca.com.