The demand for primary and noncontributory has become a very common
insurance requirement. Found in many business relationships—such as
construction, real estate, and equipment leasing—the trend is to mandate not
only additional insured status but also insist on coverage for the additional
insured as "primary and noncontributory."
Such insurance requirements often expect "primary and
noncontributory" to apply to all liability policies on which the
additional insured has been added—including any and all excess or umbrella
policies. Because substantial confusion still surrounds not only the meaning
but also the effect of these terms, revisiting intent in the context of its
usage may be valuable.
Primary Means First
The term "primary" is concerned with the order in which
liability insurance policies respond when more than one liability policy
covers the same insured for the same claim. In the context of
"primary and noncontributory," primary typically means that the
liability policy on which the additional insured has been added will respond
first—before the liability policy the additional insured has purchased in its
own name (as a named insured). In this context, however, primary does not
necessarily mean first dollar.
Consider an umbrella policy—which by definition is not a primary policy—and
the insurance requirement that the total limit of the insurance
available to the additional insured is to be "primary and
noncontributory." Often, these requirements allow the named insured to use
any combination of commercial general liability (CGL) and umbrella insurance to
provide the required limits for the additional insured (for example, the
required limits may be $5 million).
Primary Does Not Mean First Dollar
Does the additional insured truly expect the umbrella, which the additional
insured has permitted to fill out the $5 million limit, to respond first
dollar? Very likely not—otherwise, the additional insured would have required a
$5 million CGL policy and prohibited using an umbrella policy. A more
reasonable interpretation of this requirement is that the umbrella would
respond excess of the named insured's CGL policy—and, therefore,
not first dollar. In this instance, primary means first—first in
relation to the CGL policy purchased by the additional insured as a named
insured.
And herein lies the crux of the problem. Most umbrella policies' other
insurance condition simply states the umbrella policy will be excess of
virtually any other liability policy, regardless of the other liability
policy's other insurance condition. The only exception to this excess
condition is if the other liability policy is written specifically to be excess
of the umbrella—commonly referred to as a second layer or excess umbrella (for
more on a typical umbrella other insurance condition, see "Commercial Umbrella—A Few Things To
Consider," January 2016). More on the commercial umbrella problem
below.
Contribution
Contribution is an insurer's right to recovery after paying more than
its share of a loss—but it is not subrogation (for more on primary and
noncontributory, see also "Primary
and Noncontributory," March 2012). The distinction between subrogation
and contribution is not merely a technical nuance but an important practical
difference. For example, at least one commentator has opined that a waiver of
subrogation effectively prevents the insurer from seeking contribution. Such a
notion seems to confuse the derivation of the insurer's rights. In fact,
the conflation of contribution and subrogation is important enough in the
context of determining the order of coverage between primary and excess
policies that at least one court saw fit to describe the differences between
subrogation and contribution.
It is also difficult to think of two legal
concepts that have caused more confusion and headache for both courts and
litigants than have contribution and subrogation. The right of subrogation is
purely derivative. An insurer entitled to subrogation is in
the same position as an assignee of the insured's claim, and succeeds only
to the rights of the insured. Equitable contribution is entirely
different. It is the right to recover, not from the party primarily
liable for the loss, but from a co-obligor who shares such liability
with the party seeking contribution. In the insurance context, the right to
contribution arises when several insurers are obligated to indemnify or defend
the same loss or claim, and one insurer has paid more than its share of the
loss or defended the action without any participation by the others. Where
multiple insurance carriers insure the same insured and cover the same risk,
each insurer has independent standing to assert a cause of
action against its coinsurers for equitable contribution when it has undertaken
the defense or indemnification of the common insured. [Emphasis in bold
added.]
Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal.
App. 4th 1279 (Cal. App. 1st Dist. July 31, 1998), pages 1291-1292
The key takeaway is that contribution is an insurer's
independent right to seek recovery when it has paid more than its
share of a loss and that the right of subrogation is derived solely from
the insured's right. While there are similarities, contribution is
entirely different from subrogation because each right originates from a
different source. What should be evident is that an insurer's agreement to
give up its right of subrogation has no effect on that insurer's
independent right of contribution—and, therefore, the waiver of subrogation is
not the equivalent of "noncontributory."
The Commercial Umbrella Problem
Not Follow Form
The too often held but mistaken belief that all umbrella
policies are "follow form" and thus follow the "primary and
noncontributory" wording of an underlying CGL policy fails to recognize
the fundamental nature of the "primary and noncontributory" issue.
Even umbrella policies that are actually "follow form" do not follow
the other insurance condition of the underlying policies—to do so would reduce
the "follow form" umbrella to primary (first dollar) insurance.
For example, the most recent Insurance Services Office, Inc. (ISO),
"Commercial Excess Liability Coverage Form" CX 00 01, April 2013
edition, insuring agreement clearly limits the "follow form":
The insurance provided under this Coverage Part
will follow the same provisions, exclusions and limitations that are contained
in the applicable "controlling underlying insurance", unless
otherwise directed by this insurance. To the extent such provisions differ or
conflict, the provisions of this Coverage Part will apply. [Emphasis
added.]
Specifically, as respects the other insurance condition, the above ISO form
includes a "stand alone" other insurance condition that does not
follow the underlying insurance:
8. Other Insurance
a. This insurance is excess
over, and shall not contribute with any of the other insurance, whether
primary, excess, contingent or on any other basis. This condition will not
apply to insurance specifically written as excess over this Coverage
Part.1
Failure To Comply
The named insured's umbrella, which has included the
additional insured, will usually respond after the CGL purchased by
the additional insured2 (i.e., the CGL policy on
which the additional insured is the named insured). This is not the order of
coverage contemplated by "primary and noncontributory." The order of
coverage agreed upon is for the named insured's umbrella to respond
before the CGL policy purchased in the name of the additional insured.
In this instance, that order of coverage has not been met. As a general matter,
agreeing to provide "primary and noncontributory" coverage to include
an umbrella policy may result in failure to comply with the insurance
requirements.
Failure To Comply—Illustration
The tenant has agreed with the landlord to include the landlord as an
additional insured on the tenant's liability policy with no less than a $5
million limit. The landlord allows the tenant to provide the $5 million of
liability coverage in any combination of CGL and umbrella coverage. The tenant
also agrees coverage for the landlord as an additional insured will be on a
primary and noncontributory basis for the full limit of $5 million.
The tenant purchases a $1 million each occurrence CGL policy and a $4
million umbrella policy—both policies include the landlord as an additional
insured. The landlord also has its own CGL policy on which the landlord is a
named insured with a $1 million each occurrence limit and its own umbrella on
which the landlord is a named insured with a $5 million limit. The umbrella
purchased by the tenant includes the usual other insurance condition—the
tenant's umbrella will be excess of all liability insurance available to
any insured unless the liability insurance has been specifically obtained to be
excess of the tenant's $4 million umbrella.
A serious bodily injury claim occurs at the tenant's premises—triggering
coverage for the landlord as an additional insured. The tenant's CGL
provides coverage for the landlord as an additional insured—but the damages
awarded exceed $1 million—damages actually awarded are $2.5 million. After the
tenant's CGL insurer pays $1 million of damages on behalf of the landlord,
the tenant's umbrella insurer refuses to pay any damages on behalf of the
landlord until the landlord's CGL has paid its $1 million limit. This
refusal by the tenant's umbrella insurer to respond next is based on the
wording of the umbrella policy's other insurance condition—the tenant's
umbrella insurer is excess to any other liability insurance—including the CGL
policy on which the landlord is a named insured. The trouble begins.
After the landlord's CGL insurer pays the next $1 million of damages on
behalf of the named insured landlord, the tenant's umbrella insurer is
willing to pay the balance of the damages of $500,000 on behalf of the landlord
as an additional insured. The tenant's umbrella insurer then seeks
contribution from the landlord's umbrella insurer, seeking contribution by
limits (the landlord's umbrella insurer should contribute 44 percent or
4/9th of the $500,000 according to the tenant's umbrella insurer). With
this resulting order of coverage, the landlord is likely to allege the tenant
has failed to comply with its promise to provide coverage to the landlord as an
additional insured on a "primary and noncontributory" basis.
Noncontributory—Other Insurance Condition CU 24 78 11 16 or CX 24
33 11 16
In late 2016, ISO introduced two endorsements to be used
with its "Commercial Umbrella Liability Form" (CU 00 01 04 13) and
its "Commercial Excess Liability Form" (CX 00 01 04 13). Both
endorsements are titled "Noncontributory—Other Insurance Condition"
and are designated by the forms numbers listed above.
Half a Loaf
As the title suggests, these endorsement address only
contribution—and not the order of coverage. Despite replacing the
umbrella and excess liability other insurance condition, both endorsements
reiterate that the umbrella/excess insurance will be excess of all other
liability insurance—unless that liability insurance is specifically written as
excess.
The noncontributory endorsements state that if the named insured has so
agreed in writing in a contract or agreement, the insurer will not seek
contribution from a liability policy purchased by an additional insured as a
named insured. As these are scheduled endorsements, the additional insured also
must be scheduled.
The workings of these endorsements are yet to be determined, but the
endorsements appear to apply only when the liability policy of the named
insured (listing the additional insured) and the liability policy of the
additional insured (as the named insured) are both excess to any other
insurance. In other words, both policies are on the same level—the umbrella or
excess policy listing the additional insured will not seek contribution from
the umbrella or excess policy in which the additional insured is a named
insured.
Using the failure to comply illustration above, the noncontributory
endorsements would prevent the tenant's umbrella insurer from seeking
contribution from the landlord's umbrella insurer for the $500,000 paid on
behalf of the landlord by the tenant's umbrella insurer.
No Effect on the Order of Coverage
The ISO's "Noncontributory—Other Insurance Condition"
endorsements have no apparent effect on the order of coverage. As above in the
failure to comply illustration, the CGL purchased by the
landlord in its own name (as a named insured) will still be required to respond
before the umbrella insurance purchased by the tenant for the benefit
of the landlord as an additional insured. As this is not the order of coverage
generally understood as "primary and noncontributory," the ISO
noncontributory endorsement does not appear to bring about compliance with the
promise to include an umbrella policy as "primary and
noncontributory."
Conclusion
There are several major national insurers that offer umbrella policies that
address both primary (who goes first) and noncontributory (no sharing), either
within the policy form itself or by endorsement, if requested.
By way of example, here is wording from an insurer's umbrella other
insurance condition:
However, if you specifically agree in a written
contract or agreement that the insurance provided to any person or organization
that qualifies as an insured under this insurance must apply on a primary
basis, or a primary and noncontributory basis, then insurance provided under
Coverage A is subject to the following provisions:
This insurance will apply before [primary or
order of coverage] any "other insurance" that is available to such
additional insured which covers that person or organization as a named insured,
and we will not share [noncontributory] with that "other insurance,"
provided that the injury or damage for which coverage is sought is caused by an
"event" that takes place or is committed subsequent to the signing of
that contract or agreement by you.3 [Brackets
added.]
The above addresses both issues when promising to be "primary and
noncontributory"—the order of coverage as well as giving up rights of
contribution. Certainly, the above is not the only wording that would comply
with the promise to be "primary and contributory," but appears to be
clearly worded and understandable.