Additional Insureds: Primary and Noncontributory

Like many businesses, your company may engage in contracts requiring it to insure other parties under liability coverage that is both primary and noncontributory. This requirement may appear in many types of contracts, including in building leases, construction agreements, and municipal license agreements. Here's what you need to know.

How Does the Primary and Noncontributory Clause Work?

Let's look at an example. Carla owns a laundry and dry cleaning business called Casablanca Cleaners. She plans to open a new store in the commercial space she has leased in downtown Pleasantville. In order to install a sign at the new location, Carla must obtain a sign permit from the city.

Carla reads Pleasantville's permit application and notes that it contains insurance requirements. The city requires her to insure her business under a standard general liability policy that has a limit of $1 million. The policy must cover Pleasantville as an additional insured on a primary and noncontributing basis in relation to any insurance maintained by Pleasantville. So what does this mean?

Coverage Must Be Primary

The first requirement of primary and noncontributory language is that liability coverage afforded to the additional insured must apply as primary insurance. In the previous example, Casablanca Cleaning is required to insure Pleasantville on a primary basis for any third-party claims against the city that arise from the store's use of the sign. If someone is injured by Casablanca's sign and subsequently sues the city, the store's insurance must cover the suit on a first-line basis. That is, the store's liability insurance must pay first and the city's insurance will apply only after the store's coverage has been used up.

Carla can comply with the primary insurance requirement by insuring her business under the standard ISO liability form. The latter contains a clause entitled Other Insurance, which explains how the policy will respond if other coverage exists for a claim insured by the policy. The clause states the policy affords primary insurance for most covered claims.

Why do many business contracts state that liability coverage must be primary when the standard liability policy already is primary? The reason is that some liability policies contain Other Insurance provisions that differ from those found in the ISO policy. Some policies apply as excess coverage over other insurance. Others share losses with other policies on a proportionate basis.

Coverage Must Be Noncontributory

The second requirement of a primary and noncontributory clause is that coverage afforded to the additional insured must be noncontributory. This means that if the additional insured is the subject of a claim covered by the policyholder's insurance, the policyholder's insurer won't ask the additional insured's insurer to contribute any portion of the payment.

For example, suppose that Casablanca Cleaning is insured under a standard general liability policy that includes Pleasantville as an additional insured on a primary and noncontributory basis. One day, a Casablanca customer is exiting the store when the sign over the business falls off the building and injures the customer. The customer sues Pleasantville, alleging that the sign was too large for the building and that the city was negligent in allowing the business to erect it.

Casablanca's liability policy should cover the claim as primary insurance and its insurer should not ask Pleasantville's insurer to contribute any portion of the payment. The city's policy should apply as excess insurance after Casablanca's coverage has been used up.

Primary and Noncontributory Endorsement

The standard ISO liability policy affords primary insurance for most covered claims, but it does not state that coverage is noncontributory. If you have signed a contract requiring you to provide another party liability insurance that is primary and noncontributory, you must ask your insurer to add primary and noncontributory language to your policy. A standard endorsement is available for this purpose.

The endorsement states that liability insurance afforded to the additional insured is primary and that the policyholder's insurer will not seek contribution from other insurance available to the additional insured. This provision applies only if both of two conditions are satisfied:

1. The additional insured is a named insured on the other insurance.
2. You have signed a written contract stating that your policy affords primary insurance and won't seek contribution from the additional insured's policy.

What About Umbrella Policies?

Suppose that the sign permit Carla has obtained requires her to insure Pleasantville at a limit of $2 million. Carla meets this requirement by purchasing a primary liability policy and a commercial umbrella policy, each of which provides a $1 million limit. If Casablanca Cleaning's liability policy includes the primary and noncontributory endorsement, will her umbrella policy apply on a primary and noncontributory basis as well?

The answer is likely no unless the umbrella also includes a Primary and Noncontributory Endorsement. An umbrella policy includes its own Other Insurance clause. It does not automatically follow the Other Insurance provisions in the primary policy, including provisions amended by the Primary and Noncontributory Endorsement.