July 19, 2017

Primary and Noncontributory Endorsements: Why Are They Important?

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As a compliance admin, it’s no secret you have a lot to keep straight. The certificate of insurance (COI) collection and tracking process is a big job. Plus, the legalese in each endorsement can be downright confusing. One insurance term that might have you scratching your head is “primary and noncontributory.” We’ll define this common insurance endorsement and help you understand why it matters for protecting your organization from claims and losses.

Defining Primary and Noncontributory Endorsements

We’ll start with the basics of the terms. Primary and noncontributory endorsements apply to insurance policies like commercial general liability (CGL), automobile liability, worker’s compensation, and others. When multiple policies get triggered by the same event, the endorsement specifies the order in which they apply. 

  • Primary designates that one party’s liability policy is responsible for responding to a claim first before another entity’s policy applies. 
  • Noncontributory stops the primary party’s insurer from seeking contribution from the other entity’s policy for paying a claim. Noncontributory makes only one policy responsible for covering a loss.  

Another term that contributes to confusion is “waiver of subrogation” because it seems very similar. Waiver of subrogation requires an insurance company forfeit its right to sue another insurer for full or partial payment made on a claim involving multiple parties. Working together, primary and noncontributory language protects an additional insured’s policy from contributing toward payment during a claim, while a waiver of subrogation prevents reimbursement after a claim payout. 

Okay, time to put it all together. Contracts required by upper-tier companies like general contractors or property owners, for lower-tier entities such as subcontractors, should require additional insured status on a primary and noncontributory basis.” Both the upper tier and lower tier likely have CGL policies. Adding this contract clause provides the general contractor with coverage under the subcontractor’s policy. This prevents the contractor from needing to use its own liability policy in the event of a claim it did not directly or fully cause. The contractor’s loss history stays intact, and it avoids out-of-pocket costs. 

Putting Primary and Noncontributory into Practice

Let’s consider the following scenario: 

Very Good Builders hires Punctual Plumbers as a subcontractor for its construction project. A building inspector slips on a slick floor caused by flooding from a cracked pipe. He sues both Very Good Builders and Punctual Plumbers for his personal injuries. 

Who is responsible for paying the claim? To decide, we need answers to two questions: 

  • Is Very Good Builders an additional insured on Punctual Plumbers’s policy? 

If Very Good is not an additional insured, the company and Punctual Plumbers likely both will be held proportionally responsible for paying the claim. If an additional insured endorsement exists, Very Good will seek coverage solely under the subcontractor’s policy.

  • Is Very Good Builders an additional insured on a primary and noncontributory basis? 

Inclusion of the noncontributory term is important here. Without it, policies for both Punctual Plumbers and Very Good may apply should a claim exceed coverage limits. For example, the building inspector sues for $125,000, but Punctual Plumbers has a policy limit of $100,000. The subcontractor would pay up to its coverage threshold as primary and Very Good would have to pay the remaining portion. With noncontributory, Punctual Plumbers would need to trigger an umbrella policy or pay the $25,000 out of pocket because it cannot seek assistance from the policy for Very Good Builders. 

Keeping it all Straight

Primary and noncontributory endorsements are a great way for creating order and protections around your insurance policy. Understanding all the terms and phrases of the insurance world is not easy. By learning one at a time and applying it, you can continually strengthen your loss prevention program. 

If insurance jargon has you stressed, consider a COI tracking service for helping you stay organized and on top of your game. myCOI exists for one reason: to help you handle the everyday tasks of managing certificates and protecting your company against underinsured claims, costly litigation, and failed audits. The software operates on insurance industry logic with an easy-to-use, automated process for COI communication and tracking. Even when you might not understand all the insurance terminology, myCOI keeps you protected. 

Interested in learning more or want to see the technology in action? Request a product demo or subscribe to our newsletter for helpful insurance need-to-knows.

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