Very often construction contracts and agreements require a subcontractor to have the general contractor listed as an additional insured on the general liability policy as "primary and noncontributory." Although a simple requirement on its face, adding the primary and noncontributory endorsement may cause some difficulties for the subcontractor's ability to start work on the project.
The International Risk Management Institute has recommended that risk managers refrain from inserting the requirement in contracts. Although insurance agents can add this wording in the certificates they issue, they can do so only with the approval of the insurer. Many insurance companies, however, tend to push back on adding this endorsement to their policies and certificates.
What's The Problem With Primary?
With liability insurance claims, if two policies cover the same loss, one policy will typically cover on a primary basis, as the primary policy, and the other will cover on an excess basis if the primary coverage does not cover the claim, or if the limit is not sufficient to pay the entire loss.
As an example, if the primary has a $1 million dollar per claim limit and the claim is for $1,400,000, the amount over the primary limit will be paid by the excess policy.
If for example, the general contractor and the subcontractor have purchased the newer edition of the ISO's CGL form, the sub's policy will automatically act as the primary. The newer form's language makes the insured's policy excess over any other policy that added the insured as an additional insured using an endorsement. Based on this, the "primary" part of the requirement becomes a minor issue.
What's The Problem With Noncontributory?
The noncontributory part of the endorsement is more of a problem. Many contracts leave out the meaning of the term and most insurance policies don't include it at all. The general contractor is likely to believe that its policy will not even pay on an excess basis if the subcontractor's policy limit is not enough to cover the loss. In fact, the general contractor may expect the sub to pay the difference out-of-pocket.
The Standard Additional Insured Endorsement
The standard AI endorsement to the CGL policy will cover the additional insured only with respect to their liability for injury or property damage caused by the subcontractor. The AI endorsement also provides coverage for those working for the subcontractor. The coverage will last only as long as the sub has ongoing operations for the additional insured. The endorsement doesn't have any wording regarding the additional insured's coverage being "noncontributory."
This is where the problem exists. Since it is not a standard insurance industry practice to cover the additional insured on a noncontributory basis, the insurance companies are reluctant to change that. They prefer that the additional insured's coverage contribute toward paying a claim. A general contractor has very little incentive to prevent losses on a project when they know their own insurance may not be needed.
Any contractor who becomes aware of the "noncontributory" endorsement requirement should immediately notify their agent and ask that the insurance company provide the coverage. If the insurer refuses, the subcontractor must notify the general contractor and attempt to negotiate alternative terms so as not to breach the contract and then ask the agent to search for carriers that ordinarily allow the endorsement. If you have questions about primary and non-contributory construction contracts, please contact Skyline Risk Management, Inc. at (718) 267-6600 to discuss your concerns.