The ABCs of Associations: Additional Insured

A Edition: Additional Insured

Did you know that any contractor or vendor that does business with contracts that exceed $10,000 per year with a condominium association is required to name the association and board and its managing agent, if any, as additional insureds under the contractors insurance policies.  They are also required to provide certificates of insurance evidencing that the insurance is in place.  While there is not similar language for non-condos, those provisions are generally written into the contract by association lawyers in an effort to protect the association (at least our office makes a practice of it). What is an Additional Insured and why is it important?  Let’s break it down.

Insurance policies are basically contracts between a person or entity and their insurance company.  The policy has provisions that state what is and, just as important, what is not covered under the policy.  The policy is written broadly – think policies that are meant to provide general terms for use in a number of states – and then are modified with endorsements as needed to tailor the policy to the insured parties needs.  A contractor can get such an endorsement for additional insured parties.

When a party is named as an additional insured, it is covered under the contractor’s insurance policy based on the terms of the endorsement.  In Illinois, that endorsement will generally cover vicarious liability (the association is liable because of the actions of the contractor) but will often exclude coverage for the association’s own negligence.  The coverage is generally for defense (the insurance company pays for the attorneys’ fees incurred in the case) and liability (if the court rules against the association and it is liable because of the contractor’s actions). 

If an incident occurs related to the contract, the association can tender a claim to the contractor’s insurance carrier.  The insurer should provide the required defense.  If it does not, litigation might be required to obtain coverage.  Generally, the insurance company will file a declaratory judgment lawsuit seeking an order from a court stating that it has no obligation to provide any coverage to the association (or its own insured) related to the issue.  The association could file the lawsuit as well.  The stakes are high in that lawsuit as defense costs and coverage for a judgment could be significant. 

An important issue is that the obligation to provide insurance coverage for the association and management is a contractual obligation between the association and contractor.  The association is only covered if there is a valid endorsement providing coverage to the association.  If the contractor does not obtain the appropriate endorsement from its insurance carrier, the insurance company has no responsibility to the association whatsoever.  While it would be a breach of contract for the failure to provide the appropriate insurance, the association’s ability to recover anything from the contractor is based on the contractor’s ability to pay any judgment the association gets against the contractor.  Since it would prefer to have its bills paid in advance rather than chase the money, it is vital that the association do its diligence at the time the contract is made to make sure that the proper insurance is in place.

The time to verify your contractor's insurance is at the time the contract is signed — not after an incident occurs. Make sure your association is protected before it's too late.

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