Avoid a juggling act: Balancing the interests of multiple parties under a single insurance policy

We regularly receive requests from clients to “note the interests” of third parties under our clients’ policies because that third party’s financial interests may be affected by the client’s business activities or there is a contractual requirement. Common examples include:
  1. landlords and financiers in the context of buildings and motor vehicles;

  2. owners of utility or transport infrastructure assets may insist upon their interests being noted where those assets could potentially be damaged as a result of policyholders conducting their business activities; and

  3. where construction is taking place, adjacent property owners may insist upon having their interests noted under the relevant material damage Contract and Construction Public Liability policies where underground works may impact upon the foundational stability of their buildings.
In those circumstances, the third party may, alternatively, insist upon being named as insured or have cover extended to them as a third party beneficiary. This is more commonly seen where there is a greater risk of financial loss resulting from the policyholder’s activities or where the third party has some influence over the relevant endeavour.

It is important that both the policyholder and third party making the request understand the legal and commercial implications of being named as an insured, a third party beneficiary, or having their interests noted under the relevant policy, as each affords the third party different rights, particularly in the event of a claimable loss.
Named Insured:

Named Insureds enjoy the greatest level of cover under a policy and have the broadest range of ancillary rights.  Named insureds can make claims in their own right, directly to the insurer.  Under the Insurance Contracts Act 1984 (Cth) (the ICA), named insureds are entitled to receive copies of insurer notices such as renewal invitation and lapsing cover notices. Insurers must provide named insureds with copies of  policy documents upon written request.

Because named insureds can seek indemnity under the relevant policy, having additional insureds named under a policy is often seen as increasing the risk profile of the policyholder by the insurer.  Accordingly, insurers may seek to balance the increase in exposure by charging additional premium, imposing higher deductibles, or altering the scope of cover for policyholders who wish to extend cover to third parties.

If naming additional insureds, the Policyholder should consider whether the policy limits will be adequate if another insured were to bring a claim – a claim by a third party could erode the policyholder’s policy limit.  Underwriters may also seek additional information in respect of the additional named insureds and this can prolong the underwriting process.

Third-Party Beneficiaries:
Under the ICA, a third party beneficiary is not a party to the contract of insurance; it is entitled to indemnity under the policy, but is not necessarily entitled to give or receive notices to the insurer however this depends on the language of the policy itself. Essentially, the right to claim indemnity is built into the policy wording, but it is unlikely that the third party beneficiary’s name will appear on the policy schedule.
Third party beneficiary is defined under the ICA as:
A person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends
Whilst being explicitly named as an insured on the policy schedule makes it easier for the insurer to identify who can seek indemnity, it is possible for a party to be a third party beneficiary by virtue of a policy extension, or by simply extending the definition of “Insured” in the policy to include “third party beneficiaries”. A common example of a third party beneficiary is a Principal whose interest may be covered under a Principal’s Indemnity clause. This cover is often required when a policyholder is contractually required to extend cover to its Principal by contract.

If the relevant policy is silent as to whether a third party beneficiary can issue a notice of claim to the insurer directly, the third party beneficiary should insist that the party arranging the insured build this into the wording or ensure that any contract between the parties provide an avenue through which the third party beneficiary can do so.

Much like expanding cover to additional Named Insureds, having more third party beneficiaries can affect the policyholder’s risk profile who may incur greater cost, harsher coverage conditions and prolong/complicate the underwriting process.
Noted Interests
As insurance brokers, the most common request we receive is to “note the interests” of a third party. However, it is important to understand that this does not confer any express coverage rights to the party making the request. It is simply an acknowledgment from the insurer that the “noted party” has an interest in the relevant interest subject of the indemnity sought to be extended by the policy.

If the party making the request, typically landlords and financiers, want the right to claim under the policy, then they must ask to be named as an insured or to have a right to claim under the policy as a third party beneficiary.

Due to the lack of rights under the policy, the insurer should not charge additional premium to note the interests of another party on the policy.
Some Additional Considerations When Covering Multiple Parties Under the One Policy
Who Pays the Deductible: Under the policy wording, the party seeking indemnity is responsible for paying the policy deductible. If it’s the parties’ intentions that a certain party pay the deductible when a claim is made, regardless of fault or circumstance, then this should be specified in any contract between those parties.

Severability and Non-Imputation Clauses: Parties that are not responsible for arranging the insurance should ensure the policy conditions contain a Severability and Non-Imputation clause which has the effect of ensuring their rights to seek indemnity under the policy are not prejudiced by another insured party breaching policy terms and conditions, or failing to make full and accurate disclosure..

Cross-Liability and Waiver of Subrogation Clauses: Where a policy is intended to cover multiple insureds it should contain a Cross-Liability and Waiver of Subrogation Clause which prevents the insurer from paying a claim to one insured and then seeking recovery from another insured. To do so would effectively be robbing Peter to give to Paul and would undermine the intent of providing cover to the multiple parties.

Providing Evidence of the Cover for Third Parties: It is common convention for parties to provide evidence of insurance to other insureds by way of Cover Notes, Certificates of Currency or the like, with only a summary of cover being provided. Parties insisting upon being provided with the evidence should seek full policy documents and the party receiving the request should seek to limit the amount of information provided as the contents of an insurance policy is sensitive commercial information. Some policies contain confidentiality clauses and disclosure of the policy could prejudice insurers. Parties should be upfront about their expectations as to how they will prove what cover has been put in place.

Failing to Effect Insurance: Most policies contain an exclusion for failing to effect and maintain insurance as required by contract. Accordingly, if one of the parties failed to adequately extend cover to another party, this will mean the party that fails to do so is in breach of contract.

Inability to Insure Multiple Parties: It can be difficult to cover multiple insureds under certain policies. One example is Management Liability insurance for SME businesses. In that case, insurers are reluctant to provide cover to entities that fall outside a linear parent-subsidiary corporate structure. This can mean businesses like property developers and lawyers, where entities are siloed for different assets or payroll and human resources functions, may need to consider obtaining multiple policies or taking more time to present the risk to underwriters.
Conclusion
Policyholders must carefully consider the legal and practical implications associated with extending cover to third parties as it can impact their risk profile and renewal premium. Where a third party is requesting that their interests be protected under a policy, the policyholder should ensure that they fully understand what legal protection is being sought, if any. Bellrock has expertise in all issues relating to multi-party coverage and can assist in determining what cover is required for the various parties to a transaction. We recommend reaching out to one of our experienced brokers if you have any queries.