Is The Policy Primary Or Is It Excess? Make It Clear In Your Contract And You Won’t Have To Guess!

By Melanie Fitzgibbons, Risk Transfer Consultant at The Horton Group

Contractual risk transfer is an important risk transfer tool for businesses and is accomplished using a number of different provisions, one of which is requiring a subcontractor’s insurance to provide primary coverage for a claim or loss.

The intention of this requirement is that the subcontractor’s policy will pay before other applicable insurance policies, such as the general contractor’s policies.  This strategy can reduce the number of claims submitted to the general contractor’s carrier and optimize loss history.

Often, primary coverage is triggered by an endorsement, such as an Additional Insured endorsement.  The endorsement will require that certain conditions be met in order to afford the Additional Insured with primary coverage.  One of those conditions is that the contract between the parties must clearly state that the subcontractor’s policy is to be primary, or come before, the general contractor’s policy.  Without clear language expressing this requirement, the general contractor may not receive the benefit of this form of contractual risk transfer, as is evidenced in this example.

In 2009, Capitol Construction Solutions, Inc. (“Capitol”) was the general contractor for a construction project in downtown Chicago.  P&M Mercury Mechanical Corp. (“P&M”) and Tricor Carpentry LLC (“Tricor”) were two of many subcontractors on the project.  Sometime after work began on the project a sheet metal foreman for P&M named Mitchell Noworul was injured on the project site.  To recover damages for his injuries, he filed a complaint in the Circuit Court of Cook County on March 4, 2011 against Capitol, P&M, and Tricor (the “Noworul lawsuit.”)

P&M carried a General Liability insurance policy with Selective Insurance Company (“Selective”).  Capitol tendered its defense and indemnification in the Noworul lawsuit to Selective on a primary and non-contributing basis.  Notably, because P&M was Noworul’s employer, it is assumed that the subcontract agreement between Capitol and P&M included a Kotecki waiver, which obligated P&M to indemnify Capitol for liabilities related to employee injuries over and above what is covered by its workers compensation policy.

Selective refused Capitol’s tender, acknowledging that Capitol was an Additional Insured but claimed that the policy only provided Capitol with excess coverage, not primary coverage.  Primary insurance coverage is insurance coverage that attaches immediately upon the happening of the occurrence that gives rise to liability, meaning that the primary carrier starts paying beginning with the first dollar of any claims. In contrast, excess policies provide a secondary level of coverage if the insured’s liability exceeds the limits of its existing primary coverage.  Excess policies generally do not come into play unless and until the primary coverage limits are exhausted.

Why did Selective make the determination that P&M’s policy was excess?  The answer lies in the Capitol-P&M subcontract agreement (the “agreement”) and P&M’s Additional Insured endorsement.  The agreement required P&M to obtain General Liability insurance and that Capitol be listed as an Additional Insured but did not require P&M’s insurance to be primary and pay before to Capitol’s insurance started to pay.

​​​​​​​Paragraph 13 of the agreement stated:

“The Subcontractor (P&M) shall purchase and maintain insurance of the following types of coverage and limits of liability as will protect the Subcontractor from the claims that may arise out of, or result from, the Subcontractor’s operations and completed operations under the Subcontract:

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Importantly, this paragraph never mentions that this Additional Insured coverage must be primary.

Selective did acknowledge that Capitol was an Additional Insured on P&M’s general liability policy, however, the Additional Insured endorsement stated, in relevant part:

“This coverage shall be excess with respect to the person or organization included as an additional insured by its provisions; any other valid and collectible insurance that person or organization has shall be primary with respect to this insurance, unless this coverage is required to be primary and/or not contributory in the contract or agreement referred to above.”

The language of the Additional Insured endorsement stated that the Selective policy provides only excess coverage to the Additional Insured, unless required by a contract to be primary coverage.  The existence of other insurance, such as Capitol’s own general liability policy, is not what triggers whether Selective’s policy is primary or excess.  The triggering question is whether the agreement required P&M to cover Capitol with primary insurance.  If it did, then Selective would provide primary coverage to Capitol.  Because it did not, Selective’s coverage of Capitol was determined to be excess coverage only.

After Selective refused the tender, the carrier for Tricor, Country Mutual, agreed to accept Capitol’s defense of the Noworul lawsuit.  The Noworul lawsuit was eventually settled for $1.5 million.  Country Mutual contributed $1 Million and Westfield Insurance Company (Capitol’s insurance carrier) contributed the remaining $500,000.  Because each of those primary carriers had policy limits of $1 million, and the $1.5 million settlement did not exceed those combined limits, Selective refused to contribute to the settlement on the basis that it was an excess carrier.

The takeaway here is that if Capitol had clearly stated in its agreement with P&M that P&M’s coverage would be primary, then Westfield more than likely would not have contributed to the settlement on behalf of Capitol, and the Noworul settlement would have been kept off Capitol’s loss history.  If a general contractor intends for a subcontractor’s insurance to be primary, just requiring the subcontractor to purchase general liability insurance and name the general contractor an Additional Insured is not enough.  The agreement must clearly state that the subcontractor’s insurance policy is to be primary in order to trigger the policy.

Keep in mind that reviews of contracts, agreements, and leases are a value-added service and are performed at no additional charge to Horton clients.  The unfortunate situation that Capitol encountered could have been avoided if the contract had been reviewed by an insurance professional.  Please contact Melanie Fitzgibbons regarding review of clients’ contracts, insurance requirements, and risk transfer mechanisms.