If you work with commercial contracts in construction, real estate, energy or other industries, you’ve likely seen the phrase “primary and noncontributory” in an insurance requirement. It can sound confusing, especially if you’re not used to reading insurance policies.
Contracts may require at least one party’s liability insurance to be primary and noncontributory to the other party’s liability coverage. Some people assume this means one party’s insurance must pay for all claims, while the other party’s insurance never responds. If that were true, contracts requiring both sides’ coverage to be primary and noncontributory would create serious conflicts.
This incorrect interpretation may cause parties to a contract to want to remove “and noncontributory” because they think it means their insurance policy will provide unlimited coverage to the other party. However, this is not the case. Let’s break down exactly what primary and noncontributory means in a business insurance context.
What Primary and Noncontributory Means
In short, a policy with primary and noncontributory language will pay for a covered claim first and will not seek payment from other applicable insurance policies (up to the policy limits), serving as a “first line” of coverage. This generally applies when one party is required to add the other as an additional insured. It should be noted that laws and applications can vary by state.
An additional insured is a person or organization that receives coverage under another party’s insurance policy. For example, a contractor may add a property owner as an additional insured, which gives that owner limited protection under the contractor’s liability policy for claims that arise from their work.
When both parties have an active insurance policy, it’s possible that a single claim could trigger coverage under more than one policy – in the previous example, the contractor’s and the property owner’s. That’s where the terms primary and noncontributory come into play.
- Primary decides which insurance policy pays first – the contractor’s or the property owner’s.
- Noncontributory prevents one insurer from asking another to help pay the same claim. In other words, if the contractor’s policy pays for a particular claim, their insurance company cannot ask the property owner’s insurance company to help pay that claim, subject to policy terms and applicable state laws.
In short, these terms help to determine priority of coverage and prevent disputes between insurance carriers. They don’t assign fault or financial responsibility between the contracting parties.
How It Works in General Liability Policies
A commercial general liability (CGL) policy covers the named insured (the business that bought the policy) on a primary basis. That’s straightforward.
However, things get more complex when another party is added as an additional insured. That party now has potential coverage under two policies:
- Its own CGL policy (in which it’s the named insured)
- The CGL policy it was added to as an additional insured
If a loss occurs and both policies cover it, the insurance companies for the two policies must decide which one will pay first. Without specific contract language, this can become confusing and could lead to legal disputes.
Why Noncontributory Became Standard
Before the 1990s, general liability policies could be unclear about how coverage applied to additional insureds, which sometimes led courts to interpret that coverage as primary. But, because both parties’ policies were primary, the insurance carrier that provided the additional insured’s policy could seek a contribution from the other insurance company in the case of a claim.
To help address disputes, insurers and risk managers began to more commonly use noncontributory wording, which stated that the insurer covering the additional insured would not seek contribution from the other carrier.
In the late 1990s, the Insurance Services Office (ISO) revised its CGL standard coverage forms to help clarify how overlapping coverage applies. The updated language states that if an insured has coverage as an additional insured on another policy, its own policy becomes excess (meaning it pays only after the other policy’s limits are exhausted).
However, since not all insurers use these ISO forms, particularly if a policy has custom endorsements, the primary and noncontributory language may still be used. Even if it’s redundant, including this language helps to confirm that coverage will respond first and that contribution rules won’t apply.
The Bottom Line
Understanding primary and noncontributory language can help reduce confusion and potential coverage disputes. If you’re unsure how your insurance policy’s wording and coverage terms can impact your contracts, Republic Insurance Group LLC’s business insurance team can help review your policies to make sure you have the coverage you need.
Connect with a commercial insurance and risk management specialist today to learn how the team at Republic Insurance Group can help protect what matters most.
Disclaimer: This material is for general information purposes only. Nothing should be construed as legal, financial, or insurance advice. Please consult your individual legal, financial, or insurance advisors for advice tailored to your needs.