You've cut all of the 'red-tape', got you vendors lined up, set up your operations and processes, and now you've found the perfect location to set up your store. Everything seems to be falling into place, until you see that the rental agreement requires the landlord to be named as an Additional Insured. What does that mean? What does that cost? What can happen with another entity being additionally insured?
In commercial real estate and contracting operations, requests for Additional Insured status are very common. To compare Additional Insured to a personal-lines insurance item, it is similar to having a lienholder named on your Auto policy, as it is another entity that has an interest in your insurance coverage. Additional Insured status is typically created by endorsement, and will often be a requirement stipulated in a contract.
So What Exactly is an Additional Insured (AI)?
Like most insurance items, its name is very straightforward; an Additional Insured is an entity who is additionally insured by your insurance policy. An entity could mean an individual, business, or organization, and more than one Additional Insured can be endorsed to most policies. Functionally, the additionally insured entity is using the AI endorsement to shift their liability back onto you. Let's look at an example:
Set Up: You rent a unit in a strip mall to set up a high-end shoe boutique called Paymore Shoes. In the rental agreement, the landlord has required Paymore Shoes' General Liability policy to add them as an Additional Insured.
Scenario: Paymore Shoes has been a hit, and with holiday shopping ramping up, there have been shoe boxes knocked over that you haven't had the time to pick up. In a frantic rush to get the last pair of Sperry's, a customer trips over the fallen boxes and breaks her arm. She sues you for her injuries, and Paymore's General Liability policy protects you. However, the patron decides that she will get some extra holiday cash by suing the strip mall as well. Since the strip mall is an Additional Insured, Paymore's General Liability policy steps in to defend the strip mall.
Is This Fair?
The aforementioned scenario is fair--it was Paymore's negligence that caused the patron to break her arm, and the strip mall had nothing to do with it. However, there are scenarios where the strip mall was negligent but Paymore's insurance responds, and that is an unintended consequence of having Additional Insureds on your policy.
The Additional Insured can't shift all of their liability onto you, however. The AI entity will still have insurance of their own, and they will be responsible for common areas and other incidents that they are legally liable for. If the entity does try to claim under your policy, they are required to abide by all of the same rules and stipulations that apply to you: they have to prove that there was an insurable interest, they have to promptly notify the insurer, take proper steps to mitigate losses, etc.