Primary and Noncontributory Endorsements
August 1, 2023
Insurance policies can be a headache to understand with all their jargon. But to avoid expensive errors, it’s crucial to keep everything in order, especially for compliance departments.
Smart businesses stay ahead of the compliance game by requesting a Certificate of Insurance (COI) from each vendor and/or contractor they work with. However, in order to stay in compliance, they need to understand the legal jargon in the COI.
One area that causes a lot of confusion is the use of primary and non-contributory endorsements.
Below we break down what those terms mean and how they affect your insurance policies.
Primary and Noncontributory Endorsements: Why Are They Important?
Imagine this: you hire a subcontractor for a job, and someone gets hurt on the worksite. Who should be held accountable for the damages? It’s a complicated situation, right?
That’s where primary and noncontributory endorsements come into play. These endorsements determine the order in which insurance policies pay for damages or losses resulting from an incident.
Basically, these endorsements are added to a business’ insurance policies, like general liability, workers’ compensation, and commercial auto. They make sure everyone’s on the same page when it comes to footing the bill.
What are Primary and Noncontributory Endorsements?
A primary endorsement designates the party that’s responsible and liable for an insurance claim before any other entity’s insurance policy will apply to the situation. This endorsement specifies when it applies and it covers all relevant policies.
A noncontributory endorsement stops the primary party’s insurance company from trying to make another party’s insurance company pay for part of a claim. It’s basically a straightforward way of saying that the noncontributor party won’t be held responsible for certain claims.
Primary and noncontributory endorsements go hand-in-hand with COIs. They not only lay out the responsible party for insurance claims but also outline which party will not be responsible for certain claims.
Examples of Primary and Non-Contributory Language Requirements
Understanding how insurance and COIs work in complex situations can be tricky.
Let’s take a hypothetical scenario for example: a business hires a general contractor to build a new office space on empty land. This general contractor that hires subcontractors for specific tasks, like plumbing and electrical.
Before the project begins, the business owner and general contractor will agree on the insurance policy requirements for both the contractor and subcontractor. In most cases, the contract will state that the business needs to be named as an additional insured with primary and noncontributory coverage.
Now, let’s say that during construction, someone walking by the building gets hurt due to the negligence of one of the subcontractors. The injured person decides to sue the business owner, the general contractor, and the subcontractor.
Here’s where the primary and non-contributory language in the insurance policies and contracts becomes crucial. It determines who will be responsible for paying the damages.
In this case, the subcontractor’s insurance policy will cover the initial damages from the lawsuit. If their coverage is not enough to cover the damages, then the business and/or general contractor’s policies will kick in.
Typically, the construction contract specifies that the general contractor’s policy will cover any remaining damages up to its coverage limits before the business’ insurance has to contribute.
Unlimited Liability Insurance
Certain business structures don’t set limits on what can be done to satisfy business debts. This could come into play if there were an expensive claim against the business. How the business is structured — and what insurance policies the business has — determines whether the owner of the business would be personally liable for the damages.
Unlimited liability companies are typically defined as sole proprietorships in the United States. These business entities do not shelter an owner from liability to pay the business’ debts.
This means the owner could be personally responsible for paying business-related claims, should the business not have the assets to cover them.
This also applies to insurance. If an insurance policy for the ULC has reached its coverage limit, the owner could be personally responsible for paying for the remainder of the damages. This might force the owner to liquidate the business and/or use their own personal savings or assets to pay for it.
Non-ISO Additional Insured Endorsements
The Insurance Services Office (ISO) is an advisory group for the insurance industry that provides both actuarial and statistical data to businesses. ISO data helps insurers set their policy rates based on the projections for future losses.
Sometimes, insurance policies may not go by the ISO projection for additional insured endorsements.
Priority of Coverage
The priority of coverage is determined by additional insured endorsements and primary and noncontributory endorsements in insurance policies. This means one company’s policy takes the hit for damages from a claim before the other company’s policy kicks in.
Releases and Waivers of Subrogation
You’ve probably heard about primary and noncontributory endorsements, but have you heard of waivers of subrogation? They’re like releases that make one insurance company give up its right to sue another insurance company for payment when multiple parties are involved in a claim.
In simple terms, it means that the insurance company of a sub-contractor can’t sue the business’ insurance policy to cover some of the damages.
Other Insurance Condition—General (Pre-1997)
An ISO general liability policy states that one entity’s insurance is the primary on a claim when naming additional insured. As a result, one party’s insurance policy is limited to the additional insured in most claims.
The noncontributory term was introduced to help remedy the problem that both policies were used as a primary in certain situations. It outlined an agreement that one insurance company wouldn’t seek to receive a contribution from another insurance company.
Follow Form Umbrella or Excess Liability Policy
Follow-form insurance helps to provide coverage that is consistent for any excess liability policy. Follow-form umbrella policies provide excess coverage within the same terms as the original policy.
This comes into play whenever a claim exceeds the coverage amount of the original policy, as the example above illustrated.
Track Primary and Noncontributory Endorsements with Evident
Understanding all aspects of a COI is essential if you want to ensure that everyone is in compliance with your business’ insurance requirements. But, knowing what to look for – and what everything means – is just step one.
It’s challenging for compliance departments to constantly track COIs manually. Yet, missing one thing on any COI can create huge liabilities for the business.
Evident’s COI tracking platform makes it easy for businesses to stay on top of every aspect of their insurance requirements. Contact us today to find out how we can help you.