Additional Insureds: Primary and Noncontributory
Many contracts used in business require one party to provide another with liability insurance that is primary and noncontributory. A small business owner might encounter this requirement in a building lease, a construction agreement, or other commercial contract. Here is a typical scenario.
Beth owns Body Beautiful, a popular beauty salon and spa. Beth operates her business out of an office suite she leases from Premier Properties, the building owner.
Beth's current lease expires in sixty days, and her landlord has sent her a new one to sign.
Like Beth's current lease, the new contract contains an indemnity agreement and a requirement to purchase insurance. The indemnity agreement states that Body Beautiful is liable for claims against Premier Properties that result from the spa's negligence. The insurance provision requires Body Beautiful to purchase a general liability policy that includes contractual liability coverage. The policy must cover Premier Properties as an additional insured for third-party claims that arise out of Beth's use of the office suite. Moreover, the liability coverage Beth provides must be primary and noncontributory.
Beth is mystified. Her existing contract does not require liability coverage to be primary and noncontributory. What does this mean?
Liability Coverage is Primary
Virtually all liability policies contain a clause stating that they provide primary coverage.
That is, a liability policy affords first-line coverage in the event of a covered claim or suit.
While a liability policy is usually primary, it provides excess coverage for certain types of claims. These are claims that are more appropriately covered by other existing insurance. For example, a liability policy covers claims against you that result from fire damage to premises you lease.
If you accidentally cause a fire in a building you lease, and your landlord sues you for the damage, your liability policy should cover the claim. However, if you have purchased fire insurance on behalf of your landlord, that insurance will apply first. Your liability policy will apply as secondary coverage.
Primary and Noncontributory
In the previous example, Premier Properties is demanding primary coverage under the spa's liability policy even though the policy already is primary. Why? Premier is concerned about its own liability coverage.
Premier has purchased a liability policy to protect itself against claims stemming from negligence it commits in the course of its property ownership business. Premier doesn't want its policy limits used to pay claims that arise out of negligence committed by Body Beautiful. Premier wants to make sure that if it is sued because of an accident caused by the spa's negligence, the spa's liability policy will cover the claim. Premier also wants to ensure that its policy will not pay any portion of the loss.
The primary and noncontributory language in the contract is designed to protect Premier's liability coverage. It ensures that if a claim is filed against Premier that results from the spa's negligence:
- the claim will be paid by the spa's liability policy; and
- the spa's insurer won't ask Premier's liability insurer to contribute to the loss payment
Primary and Noncontributory Endorsement
A typical liability policy does not use the word noncontributory. Thus, when a contract states that liability coverage must be primary and noncontributory, a Primary and Noncontributory endorsement must be added to the policy.
The endorsement serves two purposes. First, it ensures that the liability coverage provided to the additional insured is primary. That is, if a claim occurs that is covered by the additional insured endorsement, the insurer will pay the loss without waiting for the additional insured's insurance to pay.
Secondly, the endorsement confirms that the policyholder's insurer will not seek contribution from other insurance available to the additional insured.
In other words, if a loss is covered by the additional insured endorsement, the policyholder's insurer will not ask the additional insured's insurer to pay any portion of it.
How It Works
The following example demonstrates how the primary and noncontributory endorsement protects the additional insured and its insurer.
Jane is a customer of Body Beautiful. One day, Jane is approaching the spa when she trips over a piece of loose carpeting outside the spa's front door. Jane falls and breaks her ankle. Jane sues Body Beautiful and Premier Properties for bodily injury, alleging that both were negligent. Her suit contends that spa staff members had been aware of the loose carpet for months, but had done nothing to eliminate the hazard. The suit also alleges that Premier Properties was responsible for maintaining the carpet but failed to do so.
Premier Properties is listed as an additional insured in an endorsement attached to Body Beautiful's liability policy. The endorsement covers Premier's liability for the ownership, maintenance or use of the portion of the building that is leased to Body Beautiful. The spa's liability policy includes the primary and noncontributory endorsement.
Beth sends the lawsuit to her liability insurer. The suit is eventually settled for $20,000. The insurer pays $10,000 on behalf of the spa and $10,000 on behalf of Premier Properties. Once Beth's insurer has paid the settlement, it cannot attempt to recoup its loss payment by subrogating against the landlord or its liability insurer. Beth's insurer has agreed via the endorsement that it will not seek contribution from any other insurance available to Premier Properties.