Insurance Certificate: Primary and Non-contributory Wording
Construction contracts often require a subcontractor’s general liability insurance policy to name the owner or general contractor as an additional insured on a “primary and noncontributory” basis. This seemingly simple requirement can cause a lot of difficulties and hamper the sub’s ability to start the project. The International Risk Management Institute (IRMI) recommends that risk managers not include this requirement in contracts. Insurance agents can add wording to a certificate of insurance only if the insurance company approves it. Insurance companies tend to resist adding this language to their policies and certifications.
Why are the words “primary and noncontributory” such a problem?
In liability insurance claims, when two policies cover the same loss, one usually applies on a primary basis and the other on an excess basis. This means that one will pay first (the primary policy), and the other will pay only if the primary policy does not cover the loss at all or if the amount of insurance is insufficient to pay for the total loss. For example, suppose the primary policy has a limit of $1,000,000 for each occurrence, and the loss is $1,500,000. In that case, the primary will pay its limit of $1,000,000, and the other policy, which applies on an excess basis, will deliver the remaining $500,000.
The subcontractor’s coverage is automatically primary with most contracts and insurance policies. The form’s wording makes the insured’s coverage excess over any policy that has added the insured as an additional insured by endorsement.
Therefore, the “primary” part of the requirement is a minor issue. The “noncontributory” condition is more of a problem. Most contracts do not define the term’s meaning, and most insurance policies and endorsements do not include it.
The general contractor may believe it means that its policy will not pay even on an excess basis; if the sub’s insurance limit is not large enough to cover the loss, the general contractor may expect the sub to pay the remainder out of pocket. The standard additional insured endorsement to a public liability policy covers the additional insured concerning liability for injury or damage caused at least in part by the sub’s acts or omissions. It also covers liability for acts or omissions of those working for the sub. Coverage lasts as long as the sub has ongoing operations for the additional insured. It does not say anything about the additional insured’s coverage being noncontributory. This is the problem: It is not standard insurance industry practice to cover additional insureds on a noncontributory basis. Insurance companies are reluctant to change that, as they want the additional insured’s coverage to contribute toward paying for the loss. A general contractor has less incentive to prevent losses when it knows that its insurance will not be needed.
A contractor who runs into this requirement should notify his insurance agent immediately and ask the insurance company to provide the coverage. If it won’t, he must inform the general contractor and negotiate alternative terms to avoid breaching the contract. The general contractor may agree to accept the standard endorsement with a promise not to reduce its coverage. He should also consider asking the agent to seek this coverage at the next policy renewal. Most importantly, he must understand the contract's requirements and ask questions about unclear provisions. After an insured loss, no one wants to discover that he must pay part of it with his own money.