What does it mean when you are asked to note someone else’s interest on your insurance policy? The simple answer to this question is, “not a whole lot.”
Noting a Party’s interest on a policy
Assuming your insurer allows you to do this, it does not usually confer any significant rights on the party that has asked for it. Many insurers these days do not allow it because they do not want parties to have a false impression or expectation regarding its significance. In general, simply noting someone’s interest does not confer any rights on that party to make a claim under the policy.
At best, it means that the insurer will notify the party if the insured makes a claim or the policy lapses for non-payment of a premium. This will depend on the policy’s terms and how the interest is noted.
The better way to approach this conundrum is for the noted party to consider what rights it requires or expects to be forthcoming as a result of this request. And then, tailor the request accordingly or, just leave the whole thing alone and rely on its insurance cover to insure its risks.
Joint and Composite policies
In certain instances, the policy requires the two parties to both be named, either jointly or individually, as insureds. The latter is known as a “composite” or sometimes, confusingly, “joint names” policies.
For example, a husband and wife are joint owners of their residential property. The two would normally be joint insureds on the home and contents insurance policy for their home. Contrastingly, in a joint business venture deal, the joint venturers will probably want composite or joint names insurance for the insurable risks of the venture.
In the first example, the rights of the insureds stand and fall together. If one party is, for instance, fraudulent, that will void the policy for both. The insurer can pay all of the benefits to only one party if it wants to. In the second example, each party insures their interest and can recover the amount representing that interest.
As you can imagine, the terms of the composite policy are very different from those of a joint policy. Generally, neither is available for professional indemnity insurance or where the insurer believes the parties interests conflict with each other.
Interested parties and Principal’s Liability Cover
In engineering and construction project scenarios, the Principal contractor is likely to be well served by being named as an “interested party” on its subcontractor’s policies. A common request alternative would be for the subcontractor to provide Principal’s Liability Cover for the Principal, which is a type of “interested party” cover.
In the first case, the interested party is usually able to claim under the policy. They do this under the terms of an express endorsement on the policy setting out the basis for their rights and entitlements to make a claim. An example of this type of endorsement is that sought by a bank or other financier over the home building policies of its mortgage customers.
Principal’s Liability cover restricts coverage to the Principal for its vicarious liability for the subcontractor’s acts, and as such differs slightly. In other words, the principal can’t just claim on the subcontractor’s policy instead of its policy. The subcontractor’s act or omission must relate to the claim.
Because Principal’s Liability is limited in its scope, it is usually easier to effect on a policy. This type of cover can be automatically included on some types of policy or can be effected by a request to the insurer. The principal’s name is then added to the policy schedule.
This type of cover can be particularly relevant and useful for both parties in a construction contract scenario. Typically, there is a head contractor and a subcontractor or subcontractors and the head contractor is vicariously liable to the owner.
Don’t ignore these requests
Importantly, we cannot overstate that you should not ignore the request for “noting.” Be clear and transparent with the party making the request before entering into the contract about what is possible and not possible for you to do. You should do this with regard to the terms of your policies and the requirements of your insurer/s. If you do not, you may be in breach of your obligations under the contract before it has even begun!
Of course, we at LegalVision are always ready to help! If you have any questions relating to your business contracts, or would like to chat, please give us a call on 1300 544 755.