Are You an “Insured”? Review Your Policy Carefully Before You Answer

By Neil B. Posner

The typical commercial general liability policy covers a loss that an individual or business entity becomes legally obligated to pay as damages for “bodily injury,” “property damage” or “personal or advertising injury” due to an occurrence or offense that took place during the policy period. Other types of liability policies, such as professional liability and automobile liability, cover more specific categories of risk, while property policies cover losses that may occur to property from such perils as theft or fire. Regardless of the type of peril covered, only an individual or entity that is considered an “insured” may recover losses from any of these policies. Thus, the very first question most claims personnel will ask is whether the party making the claim is actually an “insured.”

Beware of Complicated Corporate Structures

If it is unclear to the insurer whom the policy is supposed to cover, a dispute may arise when a claim is tendered. For example, many companies have complicated organizational structures or operate through multiple trade names and assumed names. Confusion can also arise regarding employees, whose status as an insured may depend on which element of the larger organization they work for or represent.

Disputes are particularly common when a company uses one or more assumed or trade names that differ from its corporate name. A tort plaintiff, for example, may be confused about whom he or she is supposed to sue. If your corporate records are not up to date with your Secretary of State’s office, then the tort plaintiff may pick an entity to sue whose name was inactive or invalid at the time of the incident that gave rise to the lawsuit. In that instance, the insurance company may be able to argue that the defendant is not an “insured” under the policy that was in force at the time of the incident. The end result, unfortunately, may be a coverage dispute that could have been avoided.

The Importance of the Application

The question of who is considered an insured can often be traced to the application stage. Typically, applicants are asked to identify the type of entity that is applying for coverage. Is it an individual, a partnership, a corporation, a joint venture, a limited liability company or something else? The answer is not always as obvious as it would seem. What, for example, does the word “individual” mean on an application? Is that the box you should check if you are applying for insurance for yourself and not your business? Suppose the entity is a corporation that also completely owns a subsidiary that is a limited liability company. How do you address that scenario?

How you complete an application is particularly important for individuals who own and operate businesses under a trade name, especially one that uses a word like “company” in its name, such as “John Q. Smith d/b/a The JQSmith Company.” Checking the “corporation” box if “The JQSmith Company” is not, in fact, a corporation can lead to coverage problems that are quite costly to solve, if they can be solved at all.

Lessons from Colorado

Choosing more than one type of entity on an insurance application, or being uncertain about which one you should select, can create costly confusion. For example, in a recent Colorado case, D.C. Concrete Management, Inc. v. Mid-Century Insurance Company, the broker sent the applicant two different versions of an application for insurance: one listing the applicant as “DC Concrete Management, Inc.” and the other showing the applicant as “DC Concrete Management, Inc., Rafael Sanchez dba.” The insurance company then issued a binder in the name of “Rafael Sanchez DBA: D.C. Concrete Management, Inc.” When the policy itself was eventually issued, it showed “Rafael Sanchez DC Concrete Management” as the insured, with a legend explaining, “The named insured is an individual unless otherwise stated.” Although the policy included boxes for indicating whether the named insured was a corporation, partnership or something else, none of those options had been checked.

A loss later occurred, and the policyholder submitted a proof of loss showing the named insured as “Rafael-D.C. Concrete Management.” The insurer failed to render a decision about whether the claim was covered, so the policyholder eventually sued. Because the insured did not claim any personal loss, the only party that was eligible to sue the insurance company was the corporation. At trial, the insurance company’s claims supervisor testified that, based on the designation of “insured” on the policy, he could not determine whether there was one insured or two. The trial court then ruled against the policyholder. The appeals court, however, held that because the designation was unclear (one named insured or two?), the policy was ambiguous and coverage should apply to the corporation. While this end result was favorable to the policyholder, the process was lengthy and costly, with a highly uncertain outcome.

The identity of the named insured is just one of many important questions to consider during the insurance application process. Questions that appear to be basic are often hidden traps. Therefore, it is critical to review your insurance applications carefully, and consult with your broker and lawyer about any doubts or concerns before signing the application.

Neil B. Posner, head of the firm's Policyholders' Insurance Coverage department, focuses his legal practice in the area of insurance coverage, with specific emphasis on insurance recovery and dispute resolution, risk management, loss prevention and cost containment. His clients include a range of public and private companies, organizations, boards of directors, individual officers and other policyholders. Neil can be reached at 312.521.2623 or nposner@muchshelist.com.

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