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The "Primary and Noncontributory" Myth

​​​Author: Bill Wilson

THE FOLLOWING IS THE BIG "I" VU'S MOST READ COMMERCIAL LINES ARTICLE OF 2017:

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Your customer has entered into a construction contract that requires, among many other things, for you to show on a certificate of insurance that additional insured coverage is provided on a primary and noncontributory basis. This article explains why it is typically impossible for you to do this.


Your customer has signed a construction contract that requires the following to be added in the Description of Operations field on the ACORD 25 certificate of insurance you're expected to issue yesterday so that your customer can get access to the job site (or get paid for work already completed):

"ABC General Contractor, Inc., XYZ Architectural Firm, Inc., and PQRST Engineers, Inc. and their respective customers, directors, officers, employees, agents, subsidiaries, divisions, affiliates, and successors are named as Additional Insureds on a primary and non-contributory basis with respect to liability for bodily injury, property damage or personal and advertising injury caused in whole or in part by the acts or omissions of either you or the additional insureds to the extent required by the written contract."

Aside from the name changes to protect the ridiculous, this statement was actually added to an issued certificate by an agency. This is not unusual...we see this kind of thing on a weekly, if not daily, basis. There are MANY problems with this statement, but this article focuses on just one of them...the "primary and noncontributory" comment. The following commentary outlines why this phrase should NEVER be placed on a certificate.

First, this is what the ACORD Forms Instruction Guide (FIG) says should go in the Description field:

“As used here, records information necessary to identify the operations, locations and vehicles for which the certificate was issued.”

What does "primary and noncontributory" have to do with the operations, locations and vehicles of the insured? Answer: Nothing. So this statement is not appropriate for this field in the certificate. The ACORD FIG has historically said that the certificate should not be used in the following situations:

  • To quote wording from a contract

  • To quote any wording which amends a policy unless the policy itself has been amended

The "primary and noncontributory" wording is requested to be shown on the certificate because the contract requires it to be done that way. ACORD makes it clear that proper use of the certificate does not include quoting contract wording. Also, unless coverage is actually provided by the policies on a "primary and noncontributory" basis, the certificate shouldn't say so. For example, the "primary and noncontributory" statement on the certificate does not reference any specific policy. The certificate included information on the CGL, BAP, and workers compensation policies. We know, or should know, that auto coverage cannot be provided on a "primary and noncontributory" basis under ISO forms.

Commercial auto primacy is governed largely by ownership and ISO's symboling system, along with various and diverse state laws. Saying that auto coverage is "primary and contributory" on a certificate quite likely does not accurately reflect the policy. As such, the certificate, on that one point, could be patently illegal in some states and in all states could be subject to allegations that it is a misrepresentation or a fraudulent insurance document, something that carriers severe penalties in all states.

Keep in mind that insurance policies govern primacy of coverage, not certificates or construction contracts, and any attempt by a certificate to purport to provide a policy right not actually afforded by the policy could be presumed to be an attempt to amend, extend or alter the policy. A majority of states now expressly prohibit this. If the certificate implies that it extends such a policy right, then it is in effect purporting to be a policy form which, I suspect, is illegal in all states whether they’ve opined on specific certificate issues or not. Either a policy grants "primary and noncontributory" coverage or it doesn’t, and the certificate should only reflect what the policy does provide.

With that said, let's focus on the CGL coverage for which that statement "primary and noncontributory" is usually directed at. The ISO CGL policy governs primacy under the Other Insurance clause:

4. Other Insurance

   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 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
      c. below.

   b. Excess Insurance

      This insurance is excess over:

      (2) Any other primary insurance available
          to you covering liability for damages
          arising out of the premises or
          operations for which you have been
          added as an additional insured by
          attachment of an endorsement.

As we can see, condition 4.b.(2) says that the CGL policy is excess over any other primary insurance under which the named insured has been added as an additional insured by attachment of an endorsement. It sounds like this solves our problem, but it doesn't. Why? First, keep in mind WHOSE policy we're looking at. It's the ADDITIONAL INSURED's policy (assuming they have an ISO or equivalent form) that governs whether AI coverage is primary or excess, NOT your insured's CGL policy. NONE of ISO's 30 or so additional insured endorsements mention the phrase "primary and noncontributory." ISO relies on the Other Insurance clause in the CGL to control primacy which, as we've just seen, lies within the AI's policy, not your insured's policy.

So, that being the case, how can YOU, the agent, say that your insured's policy is extending additional insured status to the upstream party when it's THEIR policy that controls primacy? The fact of the matter is that, when you're using ISO forms, you can't. At best, you're guessing that the AI coverage you're providing is primary. The only way to know with absolute certainty is by reviewing BOTH general liability policies. Do you do that before placing the "primary and noncontributory" wording on a certificate? Unlikely.

To make matters worse, you can't even be certain that what appears to be the unambiguous intent of the policies really is. In the case of Travelers Lloyds Ins. Co. v. Pacific Employers Ins. Co., No. 07-20157 (5th Cir. April, 2010), a tenant insured by Pacific agreed to provide "primary and noncontributory" CGL coverage for the landlord insured by Travelers. Following a customer injury, Pacific refused to provide coverage on a primary basis. The landlord's "almost ISO" policy said it provided excess coverage over any other "valid and collectible insurance available to you if you are added as an additional insured under any other policy."

However, the tenant's policy said it was excess over other insurance "unless that insurance is written specifically to apply in excess of the Limits shown in the Declarations." The court opined that this statement sounded like it was referring "specifically" to an umbrella or excess policy, not another CGL policy. So, there could possibly be no coverage or, at best, pro rata coverage. This demonstrates how important the very specific and unique wording of policies may be interpreted, making it difficult and highly inadvisable that broad wording like "primary and noncontributory" be used on a certificate of insurance, compliance checklist, warranty statement, or agent affidavit. If a loss occurs that is uncovered or otherwise denied by the downstream party's insurer, you can bet that the agent will be on the receiving end of the lawsuit.

Again, keep in mind that none of the ISO AI endorsements address "primary and noncontributory." However, a number of proprietary carrier AI endorsements do say they are primary or even "primary and noncontributory." But, once again, you don't know what the upstream party's CGL policy says, so you can't predict exactly how even this specific language might fit with the language in their CGL policy. Also, exactly what does "noncontributory" mean? I've never seen it defined in a contract. I've seen it defined a couple of times in a proprietary insurer AI endorsement, but that seems rare. If we don't know with certainty what this term means, how can we say coverage is "noncontributory" without a meeting of the minds on the meaning of the term.

Here's another issue...notice that, under the Other Insurance clause, the upstream party's CGL policy is excess over the downstream party's CGL policy only if "you have been added as an additional insured by attachment of an endorsement." Some carriers are now extending AI status on a blanket basis within their proprietary CGL policy, not by the attachment of an endorsement. For example, consider this excerpt from one insurer's liability policy:

Additional Insureds When Required By Written Contract or Agreement

The person(s) or organization(s) described below are additional insureds when you have agreed, in a written contract or agreement, that such person or orgnaization be added as an additional insured on your policy.

Because AI status is provided within the downstream party's CGL policy and not by endorsement, a literal reading of the AI's CGL policy now implies that it is NOT excess coverage, which means that it is either primary or provided on a pro rata basis. This may seem like a mincing of words beyond the intent of the policy language, but this is exactly what trial lawyers do when they are litigating policy language.

With this information in mind, along with the increasing focus of regulators on certificate wording that might misrepresent policy language, we suggest that agents use extreme caution when responding to requests to place specific wording on a certificate.

Note: In its 2013 CGL filing, ISO included a new primary and noncontributory endorsement, the CG 20 01 04 13. This form does not eliminate the problem(s) cited above but it does clearly indicate that the intention of the downstream party's CGL insurer is to provide primary and noncontributory coverage.

In addition, ISO has filed a similar endorsement for Commercial Auto

CA 04 09 11 16 – Primary And Noncontributory – Other Insurance Condition

  • Other “insured” must be a named insured on other insurance available to them
  • BAP named insured has agreed in writing in a contract or agreement that this policy will be primary and not seek contribution from any other insurance available to such “insured”
  • The BAP still excludes completed operations

Note:  Similar “noncontributory” endorsements have also been introduced in ISO’s umbrella (CU 24 78) and excess (CX 24 33) programs


Related articles:

 

On a related issue, Jack Gibson, CPCU, CRIS, ARM, president of IRMI, has written an excellent article entitled, "Sound Advice for Contract Drafters: Fix Your Out-of-Date Insurance Requirements!" that is featured in the November 2010 IRMI Insights publication.

    

Last Updated:  November 1, 2016
August 15, 2015
January 20, 2014