Published April 29, 2020 • 3 minute read
The language of insurance policies can be quite tricky. They can become particularly confusing as additional parties such as vendors, contractors, and subcontractors become involved through business operations or projects. In cases where multiple parties are included under a policy through an additional insured endorsement, determining which party should first be required to respond and to what degree in the event of a claim can be unclear.
A primary and noncontributory endorsement is an addendum to an insurance policy, which adds clarity to these questions.
When there are multiple policies involved, the primary endorsement specifies the order in which they apply. In other words, the party that is designated as the primary will be responsible for contributing to a claim first. The noncontributory portion determines whether and which other parties can be required to contribute toward the claim should it exceed the limits of the primary’s insurance coverage.
Why It's Important
Most insurance policies differ in their coverage and limits. When a claim is over policy limits, it is determined by the insurance company, the court and/or the jurisdiction, on who will be liable for the remainder.
Primary and noncontributory endorsements are an added layer of protection, which can help businesses limit their liabilities and potential losses.
Before we continue, let's review two key terms:
An additional insured is a person or entity that benefits from coverage under another policyholder under certain circumstances. You can read more about it here.
“Other Insurance" determines which policy responds to a claim for the insured (the policyholder). Plus, any additional insureds added to the policy. In some cases, additional insureds will look to modify the "other insurance" clause on the liability policy where they are an additional insured by adding a primary and noncontributory status endorsement.
Let's take a look at a primary and noncontributory endorsement in action.
A builder hires an interior design firm to stage the penthouse apartment in a luxury building. When viewing the penthouse for an upcoming showing, a realtor trips on the edge of a decorative rug and breaks his two front teeth upon hitting the floor. The design firm had not adequately laid down the rug during the staging process. The injury requires a costly cosmetic dental procedure. The realtor sues the design firm and the builder for the damages he incurs.
Assuming the agreement between the builder and the interior design firm included an additional insured endorsement, the builder will seek coverage under the interior designer’s policy.
In this situation, the interior designer firm is designated the primary and, therefore, is responsible for responding to the claim first. The degree to which they are responsible will be determined by whether or not noncontributory language is present in the endorsement.
If the endorsement includes noncontributory language, the design firm would not be able to look to the builder to contribute to the claim if its costs exceed the limits of their insurance policy. For example, if the realtor sues for $20,000 in damages, but the design firm has a policy limit of $15,000, the designer firm would pay the maximum ($15,000) through its insurance and the remaining balance through other means such as other policies or out-of-pocket payments. They would not be able to seek that balance from the builder, as they have been designated a non-contributing party.
The Most Common Use Cases For A Primary & Noncontributory
Primary and noncontributory endorsements are common practice in commercial general liability insurance among general contractors and subcontractors, property owners and general contractors, landlords, and tenants. It is also common for automobile liability policies and worker's compensation.
Primary & Noncontributory Endorsements vs. Waivers of Subrogation
A waiver of subrogation may sound similar to primary and noncontributory endorsements, but they’re actually fairly different. A waiver of subrogation denies an insurance company the ability to sue another insurer to reimburse amounts already paid to a claim involving multiple parties. Primary and noncontributory endorsements protect additional insureds from having to make contributions during a claim.
How BCS Can Help
BCS has the app-based solution your teams can use to comprehensively track certificates of insurance and other documentation so you are always aware of the details of your coverage no matter how many parties you do business with.