Primary and noncontributory is such a ubiquitous term that it is unlikely anyone involved in commercial insurance or risk management has escaped its grasp. Whether attempting to comply with the demand or determining whether someone else's insurance is primary and noncontributory, you are drawn into the fracas.
A Search for Meaning
The term is rarely defined in either an insurance policy or the underlying contract that imposes such an obligation. And there does not appear to be any well-settled understanding of the phrase. The purpose of this article is to try to move toward a more common understanding of primary and noncontributory. 1
Additional Insured
As context is significant, it is important to start by recognizing that primary and noncontributory concerns additional insured coverage. That is, the contract I have with you requires me to purchase liability insurance and to include you on my policy as an additional insured.
But not only have I agreed to include you on my liability insurance as an additional insured, the coverage I have agreed to provide to you as an additional insured must also be primary and noncontributory. Of course, it would be helpful (read necessary) to understand exactly what primary and noncontributory means.
A Likely Story
Unlimited Liability Insurance
Some have posited that primary and noncontributory means that the insurance I am providing to you is without limit. In other words, noncontributory means I have agreed to provide you liability insurance so that your liability insurance would never respond, regardless of the size of the claim.
While I understand this as a possible interpretation, it does not seem to be a very compelling one. Typically, the very same clause that requires me to provide you with primary and noncontributory coverage also requires that I purchase a certain minimum limit of liability. To, on the one hand, require a certain minimum limit and, on the other hand, contend that noncontributory means that no limit is meant to apply cannot be easily reconciled—particularly when these apparently conflicting contractual terms are used in the same paragraph.
Further, in those cases in which the damages have far exceeded primary insurance limits available, there is no evidence that any additional insured has argued, or that any court has found, that noncontributory means that the additional insured's own insurance will never be implicated.
Noncontributory and Contribution
Contribution—In General
This legal term usually is in reference to joint tortfeasors as well as joint and several liability. Joint tortfeasors means that two (or more) people are both liable to the same injured party for the same accident. Joint and several liability means the persons at fault are liable to the injured party both together (jointly) and separately (severally). The result is that the injured person may recover some or all of his or her damages from both or either of the persons who are liable. 2
For example, person A is injured in an auto accident due to the combined fault of person B and person C. Person B and person C are each tortfeasors. Because both share in the negligence, each is also a joint tortfeasor. Joint and several liability permits person A to recover all damages from either person B or person C (or from both). Should person A recover all damages from person B, person B would have a right of contribution from person C to recover more than his or her proportionate share of liability to person A. Similarly, person C would have the same right of contribution against person B if person A recovered all damages from person C. 3
Contribution—In Insurance
Noncontributory as included in "primary and noncontributory" is generally understood to mean that contribution will not take place—there will be no contribution. Put differently, "noncontributory" is casual shorthand that is to mean contribution will not be sought. But to what, exactly, is contribution referring here?
Arguably, this is a prime source of confusion. In the context of two insurance policies applying to the same insured for the same accident or claim, contribution is not referring to allocation of fault. In other words, contribution should not be viewed as an attempt to "divvy up" the relative percentages of fault between the additional insured and the named insured (or any other insured). Rather, as the Court of Appeals of California explained:
In the insurance context, the right to contribution arises when several insurers are obligated to indemnify of [sic] defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others. Where multiple insurance carriers insure the same insured and cover the same risk, each insurer has independent standing to assert a cause of action against is coinsurers for equitable contribution when it has undertaken the defense or indemnification of the common insured. Equitable contribution permits reimbursement to the insurer that paid on the loss for the excess it paid over its proportionate share of the obligation, on the theory that the debt it paid was equally and concurrently owed by the other insurers and should be shared by them pro rata in proportion to their respective coverage of the risk. [Emphasis added]
Reliance Nat'l Indem. Co. v. General Star Indem. Co., 72 Cal. App. 4th 1063, 85 Cal. Rptr. 2d 627 (1999)
This view of the meaning of contribution is further reinforced by the other insurance condition in a commercial general liability (CGL) policy form.
If two or more CGL policies share coverage for the same insured for the same accident or claim, the policy method of sharing is either contribution by equal shares or contribution by limits.
Thus, when two insurers concurrently provide coverage for the same insured for the same accident or claim, and one insurer pays more than its share of damages on behalf of the insured, the insurer paying more than its share has a right to contribution against the other insurer(s) to recover the amount it paid that exceeds its proportionate share.
Contribution—Equitable and Contractual
The insurer's right of contribution, according to the Court of Appeals of California, is an equitable right; thus, the insurer's right to contribution is based on the principle of fairness and derived from common law:
The purpose of this rule of equity is to accomplish substantial justice by equalizing the common burden shared by coinsurers, and to prevent one insurer from profiting at the expense of others. [Emphasis added]
Id.
In addition, the term contribution by equal share or contribution by limits in the CGL other insurance condition provides the insurer a contractual right of contribution.
Contribution—An Independent Right
Of great import here is that the right of the insurer to contribution, whether the right stems from equitable principles or from insurance contract wording, is clearly an independent right of the insurer—independent of the rights of any insured.
Releases and Waivers of Subrogation
The implications of this are great: if the insurer's right to contribution is not derived from the rights of the insured, advocating a mutual release between insureds or a waiver of subrogation endorsement is almost certainly unproductive in preventing contribution. Consider this distinction between contribution and subrogation:
It is also difficult to think of two legal concepts that have caused more confusion and headache for both courts and litigants than have contribution and subrogation. The right of subrogation is purely derivative. An insurer entitled to subrogation is in the same position as an assignee of the insured's claim, and succeeds only to the rights of the insured. Equitable contribution is entirely different. It is the right to recover, not from the party primarily liable for the loss, but from a co-obligor who shares such liability with the party seeking contribution. In the insurance context, the right to contribution arises when several insurers are obligated to indemnify or defend the same loss or claim, and one insurer has paid more than its share of the loss or defended the action without any participation by the others. Where multiple insurance carriers insure the same insured and cover the same risk, each insurer has independent standing to assert a cause of action against its coinsurers for equitable contribution when it has undertaken the defense or indemnification of the common insured. [Emphasis in bold added.]
Fireman's Fund Ins. Co. v. Maryland Cas. Co., 65 Cal. App. 4th 1279 (Cal. App. 1st Dist. July 31, 1998), pages 1291-1292.
What should be apparent is that a release of one insured against another does not affect an insurer's independent right of contribution; the insurer is not bound by any such release or waiver of rights between insureds. Similarly, a waiver of subrogation endorsement means only that the insurer will not "step into the shoes" of its insured to pursue recovery. But since the insurer's right of contribution is not derived from its insured's rights, waiving subrogation will not prevent contribution by the insurer. Nonetheless, the notion that waiving subrogation will effectively prevent contribution still persists. A waiver of subrogation is simply not the equivalent of providing coverage on a primary and noncontributory basis as some still insist.
Noncontributory
Of course, when an insurer seeks contribution, the insurer is exercising its own right, a right separate and distinct from any insured's rights, to recover from other insurers. It is worth repeating that whether the insurer can take the rights of its insureds, or the insureds have extinguished their rights against another, is beside the point.
What should now be evident is that noncontributory has nothing at all to do with allocation of fault among insureds but instead is concerned only with preventing an insurer from seeking its equitable or contractual independent right of recovery from other insurers.
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Priority of Coverage
Primary and noncontributory is actually about the priority of insurance coverage—which policy will respond as primary insurance and which policy will respond as excess insurance. In other words, whose policy will be first and whose will be second.
Other Insurance Condition—General (Pre-1997)
The Insurance Services Office, Inc. (ISO), CGL policy provides that if my CGL policy included you as an additional insured, my policy was primary—my policy would go first. But it does not end there.
Since you also had your own CGL policy, which was also primary to you, my insurer's obligation to you is limited:
This insurance is primary except when b. below applies. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in c. below. [Emphasis added]
ISO CG 00 01 11 85 Copyright, Insurance Services Office, Inc., 1982, 1984
Since both of our policies were primary to you as an insured (at least prior to 1997), my insurer had a right to share with your insurer by contribution. The introduction of the term noncontributory was intended to remedy this problem; noncontributory was merely an inelegant attempt at having my insurance company agree that it would not seek its independent right of contribution against your insurance company.
The goal was rather simple: even if both of our policies applied on a primary basis, you wanted my insurance to be first (primary) and your insurance to be second (excess).
Other Insurance Condition—1997 and Later
In 1997, ISO introduced a mandatory endorsement to the CGL (which has been incorporated into the July 1998 and later editions of the ISO CGL) that changed the other insurance condition.
What has changed is your policy; if other insurance is available to you covering you by endorsement as an additional insured, then your insurer deems your policy to be excess to the policy listing you as an additional insured. Problem solved. As my insurer can no longer consider your policy primary, my insurer's obligations to you are no longer affected.
Thus, if you and I both have ISO CGL policies (1997 or later), and they include ISO additional insured endorsements, then the priority of coverage issue that was our original concern no longer exists; the amended other insurance condition sets the priority of coverage the way we wanted it. Noncontributory has outlived its usefulness in this example as my insurer's right of contribution no longer exists against your insurer as your policy is excess. My policy will be first (primary) for you as an additional insured, and your CGL will be second (excess) to my policy.
Despite the clear priority or order of coverage that has been included in the ISO CGL policy forms since 1997, the demand for primary and noncontributory is still standard fare, 4 regardless of the 1997 change.
So while primary and noncontributory are not necessary when both policies are post-1997 ISO CGL policies with ISO additional insured endorsements, the concepts of primary and noncontributory are still important. So important that ISO introduced in 2012 a new CGL endorsement (available to be used in most states on April 1, 2013) titled "Primary And Noncontributory—Other Insurance Condition Endorsement" CG 20 01 (04/13).
In its Circular, 5 ISO again cited the applicable portion of the Other Insurance Condition—your CGL is excess over any other primary liability policy protecting you as an additional insured. ISO went on to observe, despite the cited Other Insurance provision, the requirement to expressly state that coverage is provided to an additional insured in the CGL on a "primary and noncontributory basis" was required in many construction contracts.
In response to the demand for "primary and noncontributory" wording, ISO promulgated the CG 20 01 endorsement, 6 which now expressly states (subject to the terms of the endorsement) that coverage provided to the additional insured is primary and noncontributory. (To learn more on Primary and Noncontributory—Other Insurance Condition Endorsement CG 20 01 [04/13] see "The 2013 Edition of the CGL Policy".)
Non-ISO Additional Insured Endorsements
Insurers writing accounts that routinely demand use of additional insured endorsements, such as insurers that provide a market for construction, have been writing their own proprietary additional insured endorsements for several years.
In almost every case, the insurer's proprietary additional insured endorsement also changes the ISO other insurance condition or otherwise changes the priority of coverage. While the substance of these proprietary additional insured endorsements often varies dramatically, here is a fairly typical change to the priority of coverage:
This insurance is excess over all other insurance available to the additional insured whether on a primary, excess, contingent or any other basis. But if required by "written contract," this insurance will be primary and non-contributory relative to the insurance on which the additional insured is a named insured. [Emphasis added]
If my policy includes the above wording, and I have agreed to add you as an additional insured, coverage for you as an additional insured will be excess over your own CGL policy unless you also require primary and noncontributory in our written contract.
Umbrella or Excess Liability—One Step Beyond
The Requirement
So far, primary and noncontributory has been considered only in situations when more than one CGL policy would apply. What happens when you have required me to include you as an additional insured on a primary and noncontributory basis not only on my CGL but also on my excess or umbrella liability policy?
This excess liability primary and noncontributory requirement is often a bit veiled; the requirement may be that I am required to provide a minimum of $5 million of insurance but that I am allowed to use any combination of CGL and umbrella or excess liability to provide the required $5 million limit. In my example, I have purchased a $1 million CGL with a $4 million excess or umbrella policy. But remember, I have agreed to provide you with additional insured coverage on a primary and noncontributory basis for all $5 million of coverage.
Most umbrella policies' other insurance conditions are entirely different from the CGL. A typical umbrella other insurance condition might state:
This insurance is excess over any other insurance, whether primary, excess, or contingent, unless the insurance is specifically written to be excess of this insurance. 7
It should be clear that a typical umbrella has no intention of responding before any primary policy available to any insured, including a primary policy available to the additional insured.
Follow Form Umbrella or Excess Liability Policy
With the Primary and Noncontributory—Other Insurance Condition CG 20 01 endorsement attached to the underlying CGL policy and a "follow form" umbrella or excess liability policy, it is often assumed that the umbrella or excess policy will follow CGL's "primary and noncontributory" wording. Any such assumption is flawed. The umbrella or excess liability policy includes its own Other Insurance condition (otherwise the umbrella or excess would be primary) and will not follow the underlying CGL's "primary and noncontributory" wording or any other part of the CGL's Other Insurance condition. Of course, the umbrella or excess liability policy's own Other Insurance Condition will usually control—and the umbrella or excess liability will usually be excess of any CGL policy of the additional insured—contrary to the order of coverage desired by the demand for primary and noncontributory. 8
For more on primary and noncontributory in the context of umbrella or excess liability policies see "Commercial Umbrellas and the Demand for Primary and Noncontributory."
Vertical and Horizontal Exhaustion
In the priority of coverage argument, "vertical exhaustion" means that my CGL and my umbrella respond first and before your CGL and umbrella; "horizontal exhaustion" means that my CGL is first, and then your CGL will respond second, before my umbrella; then both of the umbrella policies may share in payment of the balance of the loss. Horizontal exhaustion is consistent with the other insurance condition of most umbrella policies whereas vertical exhaustion does not follow the umbrella policy other insurance condition wording.
As most claims do not exceed the primary policy limits, there is minimal case law on this issue, which is often described as "vertical versus horizontal" exhaustion. However, the case law that does exist is decidedly mixed. Where vertical exhaustion has been found to apply, the courts often look outside the policies and rely on the intent of the indemnity provision in the underlying contract to determine the priority of coverage. The U.S. Court of Appeals for the Eighth Circuit made the following observation in finding vertical exhaustion:
We think this potential circuity of action is significant, in that it reveals the true nature of the parties' obligations and relationships with each other. RLI will ultimately be liable for the $ 10 million because of Cheyenne's promise to indemnify Wal-Mart and RLI's contractual-liability coverage in its policy covering Cheyenne. To prevent such wasteful litigation and to give effect to the indemnification agreement between the parties, we hold that RLI cannot recover against National Union or Wal-Mart. [Emphasis added]
Wal-Mart Stores v. RLI Ins. Co., 292 F.3d 583 (8th Cir. 2002)
Those cases that follow the horizontal exhaustion look only to the policies' terms. For example, the New York Appellate Court, First Department made this observation in finding horizontal exhaustion:
An additional line of arguments by plaintiffs is also unavailing … that J & A will ultimately be entitled to indemnification for its liability on that claim under the coverage for contractual indemnification.… The possibility of this scenario playing out in the long run does not, however, have the effect, at this stage, of negating the priority of coverage among the applicable policies arising from the terms of those policies. The rights and obligations of the insurers are governed by their respective insurance policies, not the underlying trade contracts among the insureds. After all, United's position is not based on a claim to be subrogated to J & A's rights, but on the priority of coverage established by the terms of the relevant insurance policies.
Bovis v. Great Amer. Ins. Co., 855 N.Y.S.2d 459 (App. Div. 1st Dept. 2008)
Conclusion
Primary and noncontributory is usually an attempt to establish the order or priority of coverage; it is not concerned with allocating percentages of fault. Noncontributory generally means that an insurer has agreed not to seek its independent right to contribution when two or more insurers apply to the same accident for the same insured. In this context, noncontributory appears to be shorthand for the insurer giving up its right of contribution.
Waiver of subrogation and similar approaches to prevent contribution may fail as the right of contribution is independent of any insured's rights. As subrogation is derived solely from an insured's rights, the insurer would likely retain its right of contribution.
Non-ISO or proprietary additional insured endorsements may change the priority of coverage in a manner not intended by the parties unless the underlying contract requires primary and noncontributory. While this may be viewed as unwelcome, it is reality of the marketplace.
Finally, imposing primary and noncontributory on excess or umbrella policies is inherently problematic; the other insurance condition of most umbrella policies may well thwart any such attempt. Further, the case law on this matter of "vertical versus horizontal" exhaustion is mixed and unresolved in most states.
Craig F. Stanovich is co-founder and principal of Austin & Stanovich Risk Managers, LLC, a risk management and insurance advisory consulting firm specializing in all aspects of commercial insurance and risk management, providing risk management and insurance solutions, not insurance sales. Services include fee-based "rent-a-risk manager" outsourcing, expert witness and litigation support, and technical/educational support to insurance companies, agents, and brokers. Website: http://austinstanovich.com/.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
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