Many of us who “do” agreements, such as a lease, were seemingly trained by Admiral David Glasgow Farragut, “remembered for his order at the Battle of Mobile Bay (in which he was victorious) usually paraphrased as ‘Damn the torpedoes, full speed ahead’ in U.S. Navy tradition.” [Thank you, Wikipedia.] How so? Well, we all like to jump in there and use terms of art, not our own, as if we understand those terms. Like, what? Try, insurance terms.
This will be a primer on the meaning or concept behind the insurance term: “primary and noncontributory.” [Yes, for those who are wondering, “primer” and “primary” both share the common Latin root: Prīmārius, meaning “of first rank.”] That’s helpful information because, as should become clear, the essence of what is behind “primary and noncontributory” is priority of payment, which insurance carrier pays first. Not “pays all,” but “pays first.” Yes, the “primary” in “primary and noncontributory” doesn’t mean “the most important”; it means it, the “primary” carrier, pays first. With that start, Ruminations is going to “back into” the bottom line” by explaining some related concepts. [By the way, “short’ was for last week.]
[BEFORE WE DO THAT, HERE IS A NOTE TO REGULAR READERS: If you read our April 3, 2016 blog posting about the Internal Revenue Service’s position on the tax treatment of loans with a non-recourse carve-out guarantor, then you’ll want to look again. Twelve days after we described how the IRS was creating havoc for partnerships and limited liability companies that borrowed money under non-recourse loans, the Service backtracked. You can read about that by returning to the newly annotated, original blog posting by clicking: HERE.]
Now, back to our regular programming. But, first, we feel compelled to drag out a well-worn caveat. No one, not even our refined Ruminations writing staff, will become an insurance expert just by reading today’s blog posting. There really are experts out there, and that includes a small percentage of insurance professionals. Take one to lunch. Memorize her or his phone number. Don’t be so vain as to believe you don’t need such an expert in your back pocket. Some of us may have learned our trade by watching every episode of L.A. Law, but there has been no comparable television program about risk managers at work.
So, we’ve told you that “primary” comes from the Latin root: Prīmārius and that means of first rank. When you are in first rank, you come ahead of everyone. That is, “rank” in its sense of: “a row, line, or series of things or persons.”
That was painless, but what about “noncontributory”? For that we need to explain what the law means by “contribution.” It has nothing to do with charity because, in the sense we are interested in, it isn’t a voluntary payment; it is one that someone is entitled to collect. We’ll try to explain by use of examples, and cool it on the legal jargon. When, in a single accident, two or more people are responsible for hurting someone, they are both liable for the ensuing damages. We’ll call those injury-causing people, “tortfeasors” (because that’s what the law calls them). In most places (with some technical differences jurisdiction to jurisdiction), they are “jointly and severally” liable to pay those damages. Without elaboration, that means that the injured person doesn’t have to go from tortfeasor to tortfeasor and collect 50% from one and 50% from another (or whatever the percentage of fault might have been). The injured person can drain the bank account of any one or more of them and let the tortfeasors settle up among themselves. [There are some jurisdictions that have “thresholds” of percentage of fault before the “joint” part of “joint and “several” liability kicks in, but that’s for a tort law blogger to explain.]
Why did we tell you about joint tortfeasors? That’s because the right of a joint tortfeasor who paid more than its percentage share of fault can force the other joint tortfeasor(s) to belly up to the bar and “CONTRIBUTE” its share by reimbursing the one whose bank account was tapped.
Now, we need readers to take a leap of faith and accept the following. When two or more insurance companies step in for their insureds and pay a liability claim, those companies, by law, are entitled to “contribution” from each other so that, at the end of the day, each pays only its proportionate share of the total settlement or judgment amount. Take note that we didn’t say that they have this right to reach proportionality based on any rights their own insureds may have. The right of an “overpaying” insurance company to get an “even-up” payment from another insurance company that didn’t cover its own policy holder’s proportional liability is the insurance company’s own right. It isn’t a function of its policy holder’s right. Why is that important? It is important because it means that its policy holder can’t give up the right of contribution because it isn’t the policy holder’s right in the first place.
A by-product of the “right of contribution” belonging directly to the insurer and not to its policy holder is that a release between contracting parties, think landlord and tenant, won’t eliminate their insurer’s’ right of contribution. Neither will a waiver of subrogation inside the insurance policy. [For a refresher on what a waiver of subrogation is and what it is not, click: HERE and HERE.]
So, when does it matter that someone’s insurance coverage is primary and noncontributory? It only matters if there is more than one insurance company responsible for paying a claim. If your insurance company is the only one with an obligation to pay some injured person, of course it is “first in line” to pay. And, with no other obligated insurance company in sight, there is no company from which to get “contribution.”
Ruminations hopes no reader is yet lost. Just to make sure, we’ll restate a couple of important points. First, if there is only one insurance policy involved, there is no need for its coverage to be “primary” or “noncontributory” because there is no other insurer that would be paying ahead of the “only” carrier and there is no other insurer from whom to get “contribution.”
Just to keep this “grounded,” we’ll work with a very common situation, one encountered in almost all leases. Very often, tenants are required to carry commercial general liability (CGL) insurance and also to name their landlord as an “additional insured.” Simply speaking (and ignoring complicated fact patterns), that means where both the tenant and its landlord share fault with respect to an injury-causing accident, the tenant’s insurance company is required to cover both its policy holder, the tenant, and the additional insured, the landlord. If the landlord has no other insurance coverage, only the tenant’s carrier would have an obligation to compensate the injured party.
But, bet your bottom dollar, the landlord is also going to have CGL insurance (and the tenant is paying its share of that cost). That means, in our example, there are two insurers covering the landlord. One is the tenant’s and it covers the landlord as an additional insured, and the other is the landlord’s own insurance company. Well, which carrier has to pay; if both, then which pays first; and, at the end of the day, do the two carriers have to “even up” with each other when the “bill” arrives?
The answer to that last question is what “primary and noncontributory” is all about. The carrier that is “primary” pays first. Does that mean that the “secondary” (or “tertiary” or even the “duodenary”) carrier won’t have to pay? No. If the “primary” carrier has paid out the policy limit and more is needed, those in line behind the primary carrier then get their turn to write checks.
What happens if the tenant and landlord are each found to be 50% liable for the injury caused to the check-receiving person? Well, if the tenant’s insurance policy is “noncontributory,” then that carrier sucks it up. If it isn’t, then it gets to collect from the landlord’s carrier.
Should the landlord care if the tenant’s policy is primary and noncontributory? We don’t think so because we think insurance companies are supposed to pay claims. That’s why they get premiums. We also think premiums are rarely affected by such claims. If the landlord has a sorted claim history, then its premiums may increase (and tenants will pay more), but the reason there was a claim against the landlord in the first place was because of the allegation that the landlord was, at least in part, responsible. Further, why should a tenant’s claim history be adversely affected by its landlord’s negligence? Suppose the landlord was found to be 90% liable? The tenant’s claim history will reflect a loss reflective of the landlord’s 90% liability. But, we digress.
At this point, some readers might want to sign-off. That’s because what will follow is a very rudimentary explanation of how insurance policies respond to the issue of “primary and noncontributory.” It is absolutely no substitute for procuring insurance through someone who understands how complicated this topic can be.
If you were to look at the Insurance Service Offices, Inc. (ISO) form of Commercial General Liability (CGL) policy, you’d see this (and a lot of other provisions).
If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage Part, our obligations are limited as follows:
a. Primary Insurance
This insurance is primary except when Paragraph b. below applies. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in Paragraph c. below.
b. Excess Insurance
(1) This insurance is excess over:
(a) Any of the other insurance, whether primary, excess, contingent or on any other basis:
(i) That is Fire, Extended Coverage, Builder’s Risk, Installation Risk or similar coverage for “your work”;
(ii) That is Fire insurance for premises rented to you or temporarily occupied by you with permission of the owner;
(iii) That is insurance purchased by you to cover your liability as a tenant for “property damage” to premises rented to you or temporarily occupied by you with permission of the owner; or
(iv) If the loss arises out of the maintenance or use of aircraft, “autos” or watercraft to the extent not subject to Exclusion g. of Section I – Coverage A – Bodily Injury And Property Damage Liability.
(b) Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured.
(2) When this insurance is excess, we will have no duty under Coverages A or B to defend the insured against any “suit” if any other insurer has a duty to defend the insured against that “suit”. If no other insurer defends, we will undertake to do so, but we will be entitled to the insured’s rights against all those other insurers.
(3) When this insurance is excess over other insurance, we will pay only our share of the amount of the loss, if any, that exceeds the sum of:
(a) The total amount that all such other insurance would pay for the loss in the absence of this insurance; and
(b) The total of all deductible and self-insured amounts under all that other insurance.
(4) We will share the remaining loss, if any, with any other insurance that is not described in this Excess Insurance provision and was not bought specifically to apply in excess of the Limits of Insurance shown in the Declarations of this Coverage Part.
If you hadn’t earlier, you might now appreciate why those who negotiate agreements shouldn’t “source” insurance on the side. To the extent you understand what that “Other Insurance” language is about, you’ll appreciate a readily available Endorsement (ISO Form: CG 20 01 04 13) that reads as follows:
This insurance is primary to and will not seek contribution from any other insurance available to an additional insured under your policy provided that:
(1) The additional insured is a Named Insured under such other insurance; and
(2) You have agreed in writing in a contract or agreement that this insurance would be primary and would not seek contribution from any other insurance available to the additional insured.
Well, even a casual reading will tell you that this only resolves the “who pays first” and “can we even up” issue if the other party (think “landlord” in our example) is an “additional insured” on the policy holder’s (think “tenant’s”) insurance AND is a NAMED Insured on its own policy.
What kind of issues does this raise? Here are some simple examples. The endorsement doesn’t deal with a landlord who is an additional insured on other tenant’s policies that might respond to a claim. The endorsement doesn’t have any effect on the tenant’s umbrella or excess insurance policies. They don’t generally have a “pre-packaged” endorsement like the one above. And, keep in mind, if a tenant is carrying, say, five million dollars of liability coverage, you can expect that only the first million dollars is under its CGL policy.
Those are only two examples. Qualified insurance experts can greatly expand that list.
What does this all mean when writing an agreement such as a lease? Basically, it means that just throwing the words: “primary and noncontributory” into the document doesn’t make all of a party’s insurance primary and noncontributory. Asking for the specific ISO Endorsement doesn’t cover all insurance. Obtaining that Endorsement won’t satisfy an agreement that requires “all” insurance to be primary and noncontributory.
Is there a bottom line? Sure, there is. Not all insurance policies will easily be written to be “primary and noncontributory.” If you are going to agree to make any insurance “primary and noncontributory,” then agree that you’ll carry a specific form of policy and a specific form of endorsement. Don’t agree to a “result.” Agree to specific insurance.
Though this will be unavailing, we suggest that all of us stop copying words and concepts into our agreements when we don’t really understand what they mean. Further, please think about whether you really want someone else’s policy to be “primary and noncontributory” (unless you hold stock in the insurance company with the “secondary” policy).