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Additional Insured Status and Self-Insured Retentions Revisited

Author: Chris Boggs

Previously the VU addressed a question regarding the use of a self-insured retention (SIR). The question previously asked centered around how and if the lower tier's policy extended coverage to an additional insured on a primary and noncontributory basis when the additional insured (the upper tier) utilized a self-insured retention (SIR). This week we look at the reverse situation. What if the lower tier's / downstream party's commercial general liability (CGL) policy utilizes a SIR?

Q. Does the lower tier's / downstream party's CGL policy protect the upper tier additional insured on a primary and noncontributory basis when the lower tier's CGL utilizes a SIR?

A. In respect to the time available, we must respond in the negative; an all-embracing response is more protracted and convoluted. What does that mean? It means, the short answer is, "no," and the complete answer is long and complex. But we will provide both the short answer and the long and complex answer.

The Short Answer

No, the lower tier's CGL does not extend protection to the additional insured on a primary and noncontributory basis (or any other basis) - until the SIR is exhausted. Once the SIR is exhausted, the CGL then provides coverage to the additional insured on a primary and noncontributory basis. Clear as mud yet?

Allow me to say it a different way. Additional insured status applies only when protection is triggered in the CGL (duh!). Likewise, primary and noncontributory status is a function of the insurance coverage granted to the additional insured by the CGL (again, duh!).

Thus, the additional insured is covered on a primary and noncontributory basis only when the CGL responds. But when the lower tier's policy has an SIR, the CGL does not (or may not) be triggered or respond until the named insured has exhausted that SIR.

The Long and Complex Answer

Insurance is nothing more than a risk financing mechanism. How the insured constructs that risk financing mechanism is a business decision. If/when an insured decides to use a SIR, the SIR becomes the first layer of financing; in essence, the first layer of protection. Once the SIR is exhausted, the insurance policy responds as the next layer of protection. The named insured cannot enforce any rights of coverage upon the insurance carrier until the SIR requirement is satisfied.

Likewise, in the presence of a SIR, the additional insured cannot receive any benefit from the insurance policy or enforce any action regarding coverage against the lower tier named insured or the insurance carrier until the SIR is satisfied. This Indiana Court of Appeals stated this in its recent decision of, Walsh Construction Company v. Zurich American Ins. Co., No. 45A04-1606-PL-1284 (Ind. Ct. App. Mar. 28, 2017).

The Appeals Court stated, "As a matter of first impression, we hold that a self-insured retention endorsement to a commercial general liability insurance policy requires the named insured to satisfy the amount of the endorsement, whether on its own behalf or on behalf of an additional insured, before the additional insured may seek to enforce the policy against the insurer."

Further, the finding asserts, "…there is no rational basis to apply the SIR endorsement as a condition precedent to Zurich's coverage of the named insured but not to Zurich's coverage of additional insureds." Plainly, the additional insured has no rights under the policy until the named insured has rights. Since the CGL was not triggered by the named insured (no claim was made), and the SIR had not been satisfied, Zurich owed no defense or protection to the named insured or the additional insured.

Primary status was also addressed by the court, "We also reject Walsh's argument that, '[i]f Zurich's duty to provide coverage to Walsh...is conditioned upon Roadsafe satisfying its $500,000 SIR amount,

then the [CGL p]olicy by definition cannot be primary as to Walsh.' Walsh is still a primary insured under the CGL policy and has no less status than any other primary insured." Essentially the court asserted that once the policy is triggered, coverage is provided to the additional insured on a primary basis.

The court goes on to state, "If Walsh disapproves of its subcontractors obtaining SIR endorsements, Walsh can manage its contractual relationships with its subcontractors accordingly." It seems the court told Walsh to stop crying and manage its contractual relationships better.

Oh, but wait, speaking of contractual relationships, what about the contract between the parties? Certainly, there is some form of contractual risk transfer requiring the lower tier to indemnify, hold harmless and defend the upper tier for and from certain actions. The existence of such a contract may succeed in providing "additional insured-like" status and "primary and noncontributory-esque" level protection regardless of the existence of the CGL and its SIR.

Additional insured protection extended on a primary and noncontributory basis is a function of the insurance policy (as stated earlier); however, the requirement to indemnify, hold harmless and defend is a contractual requirement placed on the lower tier - irrespective of the existence of insurance. Insurance is generally addressed in a contract only because the upper tier wants to confirm that the lower tier has some means to pay for (finance) what it has agreed to in the contract. In this situation, the lower tier chose to finance its contractually-agreed-to responsibilities using a SIR as the first layer of protection.

Contractual risk transfer, assuming the level of transfer complies with state laws, reestablishes the requirement that the lower tier protect the upper tier by whatever risk financing means is available. This was alluded to by the court when it stated, "…we hold that a self-insured retention…requires the named insured to satisfy the amount of the (SIR) endorsement, whether on its own behalf or on behalf of an additional insured…." The lower tier may exhaust part or all of its SIR on behalf of and for the benefit of the upper tier to satisfy its contractual responsibilities.

Contractual risk transfer requirements make the lower tier responsible to the upper tier regardless of the existence of an insurance or the effect of the SIR. Once the SIR is satisfied, the CGL takes over and protects the upper tier as an additional insured on a primary and noncontributory basis.

Interestingly, the lower tier joined Walsh in its appeal to force Zurich to respond to Walsh's claim on a primary and noncontributory basis. Evidently, Roadside (the lower tier) didn't want to spend its own money complying with the contractually agreed upon risk transfer. How wrong is that? Roadside chose the SIR, but then didn't want to pay up when the carrier, and now the court, asserted it was the lower tier's job to comply with the risk financing mechanism it selected.

Roadside was more-than-happy to lower its premium, but not so pleased when its risk financing choice bit them in the backside; I mean the wallet.

Following is the question and answer from two weeks ago as a comparison of these two sides of the SIR coin regarding the primary and noncontributory question. Whether or not primary and noncontributory protection is extended to the additional insured from the first dollar is a function of who utilizes, or which policy applies, the SIR.

Primary & Noncontributory Contractor Coverage (From 4/14 VUpoint)

Q. If an insured is a downstream (lower tier) contractor of an entity that maintains a Self-Insured Retention (SIR) of $1 Million, is the lower tier contractor's coverage primary & noncontributory to the SIR when the CG 20 01 is attached?

A. Let's first look at the terms and intent when it is required that coverage be provided on a "primary and noncontributory" basis by use of the CG 20 01:

  • Primary: The intent is that the lower tier's policy respond first to any claim that can be contractually transferred to it by the upper tier.
  • Noncontributory: The intent is to forbid the lower tier and its insurance carrier from seeking contribution from the upper tier or its insurance carrier if the upper tier is partially at fault for the injury or damage.

What a bunch of nothing. The Primary and Noncontributory endorsement (CG 20 01) is of absolutely no use and effect. In reality, the lower tier's policy is likely already primary and noncontributory because of endorsements and contractual requirements.

The lower tier's policy is primary if the upper tier is named as an additional insured on the lower tier's policy and the upper tier's policy uses "Other Insurance" wording similar to that developed by ISO more than 20 years ago. Recently I polled the VU's experts, and none were aware of any CGL forms that don't use something similar to ISO's "Other Insurance" wording.

Additionally, the lower tier's coverage is provided on a noncontributory basis because of the attachment of the "Waiver of Transfer of Rights Against Others to Us" endorsement, which is generally combined with the contractual requirement that the lower tier (downstream party) waive any right of recovery against the upstream party (the veritable "belt and suspenders" approach). The "Waiver of Transfer of Rights Against Others to Us" endorsement includes the agreement to waive the right of contribution.

The CG 24 04 states, "We waive any right of recovery…." Any right includes the right of contribution. So when this endorsement is attached, the right of contribution is waived and coverage is provided on a noncontributory basis.

When considering the effects of an SIR on coverage provided on a primary and noncontributory basis don't confuse the purpose of contractual risk transfer with the purpose of insurance. Both are risk transfer mechanisms, just making use of different means of transfer.

The upper tier contractor uses contractual risk transfer to place allowable levels of financial responsibility on the lower tier (based on the level of transfer allowed in the state – limited, intermediate or broad). The lower tier purchases insurance to finance the level of protection they have contractually agreed to provide to the upper tier.

As part of the contractual risk transfer, the upper tier has placed a requirement that the lower tier's insurance policy provide the required level of coverage (financing) on a primary and noncontributory basis. If the specific endorsements mentioned previously are attached (and the CG 20 01 is not necessarily required), this goal is accomplished.

The upper tier's use of a Self-Insured Retention is meaningless to the lower tier in regard to when and how its policy responds to a loss. A self-insured retention is nothing more than the financing mechanism chosen by the upper tier to pay for its own liabilities or those for which it is responsible.

There are two requirements found in the CG 20 01:

  1. The additional insured is a named insured under its own policy; and
  2. The lower tier contractually agreed to provide coverage on a primary and noncontributory basis. 

Requirement "1)" is met if the upper tier is a named insured on its own policy, regardless of the SIR. We will assume a contract exists requiring coverage be provided by the lower tier on a primary and noncontributory basis, so requirement "2)" is met.

So, if 1) the upper tier is a named insured on its own policy, 2) the lower tier is liable (legally or contractually), 3) the contract is in compliance with state law, and 4) all the requisite AI and Waiver endorsements are attached, the lower tier's policy is going to pay on a primary and noncontributory basis – regardless of the SIR.

Remember, the SIR is a type of coverage; it is the first layer of coverage chosen by the upper tier on its own policy to cover its own legal liabilities.

Last Updated: April 28, 2017

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