Primary And Noncontributory – What’s The Scoop?

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Last week we wrote about a lease seemingly written by an inexperienced draftsperson. Though our point was to highlight the danger of inexperience, the court-reported situation we described also dealt with a missing insurance concept, that of calling (or not calling) for “primary” coverage. As a result, we got a few inquiries about the meaning or implication of that insurance term” and also about its sibling term, “non-contributory,” such as in: “The required coverage must be “primary and non-contributory.” So, here’s the scoop.

“Primary(ness)” (as does “noncontributory”) has to do with the priority of payment and only involves a situation where one party, named as an additional insured on the other’s liability insurance policy, also has its own insurance. When one of those two insurance policies is “primary,” and the other is not, the one that is primary will pay out until its policy limit is exhausted. At that point, if more needs to be paid, the other policy will cover the “excess.” [As to “noncontributory, we’ll get to it.]

Today, when both parties have the most common type of Commercial General Liability (CGL) form policies, the ones utilizing the versions promulgated for the last 20 years by the Insurance Services Organization, Inc. (ISO), and each party’s policy actually would cover the claim, then the issuer of the additional insured endorsement will be the “primary” carrier. That’s because the commonly used ISO CGL policy reads that if its holder is an additional insured on someone else’s CGL policy, the additional insured’s own coverage will be “excess” to coverage under the insurance policy naming that party as an additional insured. The same form of ISO CGL policy acknowledges that it will pay first (until the policy limit is exhausted). Simply said, current ISO form CGL insurance policies state that coverage is “excess” over any coverage the insured may have as an additional insured on another party’s policy and, by implication (at a minimum) will be the primary payer for (covered) claims against additional insureds.

How does that work? Well, the text of the basic CGL policy (ISO Form CG 00 01 04 13, the “04 13” or April 2013 version) has the following provision dealing with “other insurance”:

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.

(a) Excess Insurance

            (1) This insurance is excess over:

            (a)

(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 by attachment of an endorsement. [Underlining ours.]

So, if the party holding such a CGL policy is also an additional insured on another’s liability insurance policy, its own policy will sit back and wait until that other insurance policy runs out of money (hits its limit). By way of example, if a landlord with its own CGL policy is endorsed as an additional insured on its tenant’s CGL policy, then the landlord’s policy only provides “excess” coverage.

How does that other policy (in our example, the tenant’s CGL policy endorsed with the landlord (by example) as an additional insured) feel about the previous paragraph? Well, it has the same text as we quoted above. The only difference is that it has that “magic” additional insured endorsement naming the landlord (in our example) as such. Therefore, under “a.” the tenant’s policy is primary because nothing in “b.” applies.

Thus, if both parties have a CGL policy utilizing the ISO language, and the party (in our example, the landlord) is named on the other party’s policy (in our example, the tenant’s) as an additional insured, there is no need for any agreement say, a lease) to require that the other party’s (read that: tenant’s) policy be “primary and noncontributory.

Nonetheless, confusion (and ignorance – not stupidity) abounds and “everybody” continues to call for “primary and noncontributory.” So, ISO to the rescue (i.e., it makes those who doubt that the insurance is already “noncontributory” happy) – it has a form, its Form CG 20 01 04 13. [That’s the April 2013 (04 13) version]. It reads as follows:

The following is added to the Other Insurance Condition and supersedes any provision to the contrary:

Primary And Noncontributory Insurance

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.

So, even though for over 20 years the ISO CGL policy has been written in a way that makes the carrier with the “additional insured” pay first and not be able to seek recovery from that additional insured’s own carrier, the ISO and those many, many insurance companies using the ISO series of forms, have given in to “market demand” by offering the Primary and Noncontributory endorsement.

OK, so all we have left is our promise to explain “noncontributory” and scribble a concluding coda. Contribution is a legal principle with slightly different meanings depending on context. In tort situations, when two or more parties are found to be liable for the same injury caused to a person or that person’s property, the injured person doesn’t have to go around to each wrongdoer and collect that wrongdoer’s proportionate share of the liability. The injured person can collect the entire amount of damages from any one of the wrongdoers. Then those from whom money was collected have the right to “settle up” among all the wrongdoers. Those who paid more than their liability-allocated share of the damages are able to seek “contribution” from those who paid nothing to, or who underpaid, the injured person.

The concept of “contribution” is the same or “kind of” the same as between insurance companies, except that it deals with “settling up” as between or among those insurance companies who have insured the wrongdoers. This right in the hands of the insurance companies is not derivative of the rights of the policyholders. That’s important because it means that the insured parties to an agreement can’t merely agree between or among themselves that they won’t seek contribution from each other and expect their own insurance companies to be bound by such an agreement. A policyholder’s right of contribution is separate and apart from the right of its insurance carrier. That’s why the insurance policies have to be written in a way such that the insurance company waives its right to collect from the other insurance company(ies).

For those who might be thinking: “subrogation” and waivers of subrogation, here’s the distinction. The right of subrogation (for insurance situations) is where an insurance company, normally able to step into the shoes of its own insured and pursue whatever covered claims its insured might have, agrees that it won’t. Basically, the insurance company agrees that its own insured can give up the right to collect from other parties to an agreement, including whatever right of “contribution” it might have. But, that only deals with the policyholder’s right of contribution. It does not affect the insurance companies separate right of contribution from the other insurance company or companies. Its policyholder can’t waive claims against the other insurance companies in a way that defeats its own carrier’s independent right of contribution against another party’s insurance carrier.

HERE IS AN IMPORTANT CAVEAT. Though most insurance policies use or are based on ISO forms, not all are. So, even though being named as an additional insured would result in that coverage being “primary and noncontributory” when ISO CGL policies are in force, that can’t be said if the policies being used are not ISO forms. This is more common for construction policies, but there is no “law” or “rule” that a carrier use an ISO form. For that reason, it remains wise, probably “mandatory” to call for the policy containing the additional insured endorsement to also be endorsed with a “PRIMARY AND NONCONTRIBUTORY – OTHER INSURANCE CONDITION endorsement utilizing ISO Endorsement Form CG 20 01 04 13 or substantive equivalent.” Belt and suspenders? Yes.

There’s a lot more that could be said (written) but, at this point, the best advice Ruminations can give is for interested readers to consult with a competent insurance advisor, broker or agent.

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