“Additionally Insured” Explained

One of the most important reasons landlords hire a property manager is to help
limit exposure to and manage the inherent risk of owning rental property.
Often, questions arise as to why it’s important to add the property manager as
Additionally Insured on the Homeowner’s or Property Owner’s insurance
policy. Some of the key questions are addressed below:
Why should I list my Property Manager as Additionally Insured on my
Insurance Policy?
Experienced and well-informed management firms are increasingly requiring the
Property Owner to add the Property Management Company as Additionally
Insured on the owner policy. While often overlooked out of convenience or
misinformation, it is a very important element of an overall risk management
strategy not only for the Property Management company but also for the Property
Owner.
What does “Additionally Insured” mean?
The Additionally Insured verbiage on a homeowner’s policy simply means that the
coverage is extended not only to the owner of the property but also to the listed
agent or Management Company. Some insurance agents and property managers
will confuse “Additionally Insured” with “Additional Interest”. They sound
similar but are vastly different. “Additional Interest” does not extend coverage but
will simply notify the property manager of policy renewals, cancellations, or policy
changes. Another common misconception is that the Additionally Insured
verbiage will provide the Property Management firm with a financial interest in the
property. Unlike a mortgage holder, the Property Management company does not
have, or want, a financial interest in the property but nevertheless has a very
insurable interest from a premises liability standpoint such as personal injury on
the premises.
Why is adding the Property Manager as Additionally Insured important to
the Property Owner?
When a property manager is hired, they take on almost all the responsibilities as if
they were the homeowner. As such, if something were to go wrong, such as
personal injury, the Property Manager is often the target, in place of the owner, of
any resultant litigation.
For this reason, almost all reputable Property Management firms have a strong
indemnification and hold harmless clause as part of their management
agreement. If the management company is properly listed as Additionally Insured,
the coverage will automatically be extended to both parties as needed.
In the worst of cases, if a major litigation claim takes place, it is likely that both
Property Manager and Owner would be named as co-defendants. Having the
owner policy extended to both, would create a unified defense, with one insurance
company defending both, streamlining the defense process and significantly
reducing total legal expenses for all for which the owner (or the insurance
company) is ultimately responsible.
Why is the Additionally Insured endorsement on the owner’s policy important
to the Management Company?
Most Property Management firms carry General Liability Insurance as well as
Professional Liability insurance which will offer protection from a financial loss
caused by a mistake or wrongful act by the Management Firm. However, these
policies don’t provide protection against matters concerning the home itself. This
leaves the property manager vulnerable to claims regarding someone injuring
themselves at the property, burglary, fire, water leaks, etc. When coverage is
effectively extended to the Property Manager through the Additionally Insured
endorsement, the problem is solved.
Without the Additionally Insured endorsement, the management company could be
left to fend for itself and then seek reimbursement from the owner directly (or their
insurance) for any losses under the indemnification clause. Needless to say, this
alternative would be exponentially more expensive and time consuming for all.
Are Insurance Companies willing to add the property manager to the owner’s
policy as Additionally Insured?
Most of the larger insurance companies understand that doing so is in their
customer’s best interest and will add the Property Management firm upon request
for little or no additional cost. However, some of the smaller or specialized
companies view adding a third party to the policy as taking on additional risk and
refuse to do so. While there may be some merit to their viewpoint, it can be
argued that using a professional management company will reduce overall risk and
that since the owner is indemnifying the management company, they would
eventually be faced with a payout on behalf of their customer. Accordingly, their
total cost of a payout could be significantly reduced if they are in control of the
claim from the beginning.
Helpful Tips for Setting Up Insurance for Your Rental Property:
1) Make sure that your Insurance Agent understands that you are requesting the
Property Management Firm be added as “Additionally Insured”, not merely
“Additional Interest”.
2) Ask if there is an additional charge for the “Additionally Insured”
endorsement. If there is, you may want to shop around but remember that
the overall cost effectiveness of your policy may still be better even with an
additional fee.
3) Ask your Insurance Agent if there are any other products their companies
offer that may be useful to you, i.e., lost rent protection, upgraded
commercial policy, etc.
4) If your Property Management company is contending that an Additionally
Insured endorsement on your policy is not important, carefully question their
rationale and be sure you’ve contemplated the risk.
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Disclaimer: It is always recommended that you seek the advice of a local attorney
to more about real estate laws and how they can impact you and your property.