A common insurance requirement in commercial contracts of all types (construction, energy, real estate, etc.) requires at least one party’s liability insurance to be “primary and noncontributory” to the other party’s liability insurance coverage. Those not well-versed in insurance policies may interpret this language to mean that one party’s liability insurance coverage will pay any and all claims arising from the contract, without limit – so that the other party’s liability insurance would never respond, regardless of the size of claim. If this interpretation was accurate, it would result in great confusion in contracts where both parties’ liability insurance are required to be “primary and noncontributory.” This incorrect interpretation often leads parties to a contract wanting to delete the term “and noncontributory” from the compound requirement “primary and noncontributory” because they think it means their insurance policy will provide unlimited coverage to the other party – but that is not the case.
The requirement for a party’s liability insurance to be “primary and noncontributory” only means something IF there is a requirement to include another party as an additional insured. The true purpose of a requirement for one party’s liability insurance to be “primary and noncontributory” is to determine the priority of coverage between the parties’ liability insurance policies (“primary”) and prevent one party’s insurer from seeking recovery from the other party’s insurer(s) (“noncontributory”); it has nothing to do with allocating percentages of fault among the parties.
Commercial General Liability (CGL) policies provide coverage to the named insured (normally the party who pays for the insurance) on a primary basis, which is pretty cut-and-dry; the policy pays for covered claims caused by the named insured’s negligence. Determining coverage gets a little more complicated when a party is an additional insured (typically a party who doesn’t pay for the insurance, but enjoys the benefits of being insured under the policy) because now the additional insured presumably has insurance for covered claims under two policies – the policy in which the party is included as an additional insured and the party’s own policy as a named insured. In this situation, the two policies must determine which one pays first and if the two policies will share the cost of a claim. Absent a contractual obligation that provides differently, the common law rule requires contribution (by equal shares or policy limits) among insurance policies that provide coverage for the same insured for the same claim. Before the Insurance Services Office (ISO) CGL form and ISO additional insured endorsements were amended, the term “noncontributory” was introduced as a method to prevent an insurer from seeking contribution from another insurer.
Standard CGL policies include a provision titled “Other Insurance” that outlines how an insurance policy will pay claims when there’s more than one policy to provide coverage for the same insured and the same claim. In CGL policies issued before 1997, the Other Insurance provision provided primary coverage to an additional insured, but the problem was the additional insured also had primary coverage under its own policy as the named insured. Since both policies providing coverage were “primary,” the policy providing additional insured coverage had a right to contribution from the policy providing named insured coverage. In CGL policies issued after 1997, the Other Insurance provision says if the named insured has coverage under another insurance policy as an additional insured, then the policy providing named insured coverage is excess to the policy providing additional insured coverage. If every insurer used ISO additional insured endorsements, it would be unnecessary to require that additional insured coverage is “primary and noncontributory.” Unfortunately, most insurers use their own proprietary additional insured endorsements instead of the ISO endorsements. These proprietary endorsements almost always change the ISO “Other Insurance” provision or otherwise change the priority of coverage; many proprietary endorsements provide that coverage for an additional insured is excess UNLESS a written contract requires additional insured coverage to be “primary and noncontributory.” The common use of proprietary additional insured endorsements that modify the Other Insurance provision or the priority of coverage to an additional insured makes it difficult for a party requiring additional insured coverage to know if it’s necessary to require that the coverage is also “primary and noncontributory.”
The best solution is to always require additional insured status on a “primary and noncontributory” basis. This may be redundant if a party’s insurance carrier uses ISO endorsements, but it’s the best way to know that the common law rule requiring contribution will not be applied in the event of a claim.
Need help understanding these provisions? Our contract review experts provide guidance to our commercial insurance clients.