WHAT’S IN A NAME? THE IMPORTANCE OF NAMED INSURED UNDERWRITING

When underwriters think about risk, perilssuch as fire and theft come to mind. One risk that can be overlooked isimproperly underwriting multiple named insureds. This article will discuss theimportance of underwriting named insureds.

A key element on any commercial insurancepolicy is the named insured. A named insured can be defined as “any person,firm, organization, or any of its members specifically designated by name as aninsured(s) in an insurance policy.”[i]The named insureds are listed on a policy’s declarations page. We shouldremember that named insured status provides full coverage under the generalliability policy. Consequently, it is vital that we understand all of theoperations of any named insured listed on a policy.

With just one named insured, this is simple.The underwriter assesses the named insured’s operations and then decides toeither accept or decline the risk. However, with multiple named insureds, thisprocess gets more involved. If you have more than one named insured on apolicy, then we have a first named insured. The first named insured mustexercise management control over all of the other named insureds on the policy.To justify adding additional named insureds to a policy, the underwriter mustreview the following: First, does the new named insured have an insurableinterest? That is, is there an ownership interest that justifies adding thisnamed insured to the policy? In particular, are we comfortable with the newnamed insured’s operations? Moreover, we need to determine if the namedinsureds are combinable. To be combinable, the entities should have commonmajority ownership. This means one named insured owns more than 50% of theother named insureds. Or more than 50% of each named insured is owned by thesame majority owners. In summary, if there is a valid insurable interest foradding newly named insureds, the named insureds are combinable and the firstnamed insured exercises management control over the other entities, anunderwriter can feel comfortable adding these additional named insureds.

What is the problem if you add a named insuredto a policy that doesn’t meet this criteria? It can create a conflict ofinterest. You could encounter what is known as cross-liability. This means oneinsured suing a party who is also an insured on the same policy! This canhappen under the principle of severability of interests; that is, liabilitycoverage is provided separately to each insured. In short, poorly named insuredunderwriting can lead to a conflict of interest and litigation betweendifferently named insureds. 

Named insured underwriting is a critical task.The underwriter wants to make sure the additional named insureds have aninsurable interest, these entities are combinable, and that the first namedinsured is exercising management control. Failure to do so can lead to aconflict of interest or possible litigation among the entities. In short,underwriters must always carefully underwrite their named insureds.

Resources:

[i]International Risk Management Institute GlossaryOf Insurance And Risk Management Terms 10th edition 2006Page 162

 Postauthored by Alex Plotkin. Originally published June 20, 2018. View original post at:

https://wp.me/p1Iv7E-2L9

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