An insured is a lower-tier contractor of an entity that maintains a self-insured retention of $1 million. Is the insured’s coverage primary and noncontributory to the self-insured retention?
An insured is a lower-tier contractor of an entity that maintains a self-insured retention of $1 million.
Q: Is the insured’s coverage primary and noncontributory to the self-insured retention when the Primary and Noncontributory endorsement (CG 20 01) is attached?
A: First consider the terms and intent when coverage is required to be provided on a primary and noncontributory basis by using the CG 20 01:
- Primary: The intent is that the lower-tier contractor's policy respond first to any claim that can be contractually transferred to it by the upper–tier contractor.
- Noncontributory: The intent is to forbid the lower-tier contractor and its insurance carrier from seeking contribution from the upper-tier contractor or its insurance carrier if the upper tier is partially at fault for the injury or damage.
What a bunch of nothing. CG 20 01 has absolutely no use or effect. In reality, the lower-tier contractor's policy is likely already primary and noncontributory because of endorsements and contractual requirements.
The lower-tier contractor's policy is primary if the upper-tier contractor is named as an additional insured on the lower-tier contractor's policy, and the upper-tier contractor's policy uses "other insurance" wording similar to what ISO developed more than 20 years ago. When I polled Big “I” Virtual University (VU) experts about this, none were aware of any commercial general liability forms that don't use something similar to ISO's "other insurance" wording.
Additionally, the lower-tier contractor's coverage is on a noncontributory basis because of the attachment of the Waiver of Transfer of Rights Against Others to Us endorsement, which is generally combined with the contractual requirement that the lower-tier contractor waive any right of recovery against the upstream party—the veritable "belt and suspenders" approach. The Waiver of Transfer of Rights Against Others to Us endorsement includes the agreement to waive the right of contribution.
The CG 24 04 states, "We waive any right of recovery." Any right includes the right of contribution, so attaching this endorsement waives the right of contribution, and coverage is on a noncontributory basis.
When considering how a self-insured retention affects coverage on a primary and noncontributory basis, don't confuse the purpose of contractual risk transfer with the purpose of insurance. Both are risk transfer mechanisms—they just use different means of transfer.
The upper-tier contractor uses contractual risk transfer to place allowable levels of financial responsibility on the lower-tier contractor, based on the level of transfer the state allows—limited, intermediate or broad. The lower-tier contractor purchases insurance to finance the level of protection it has contractually agreed to provide to the upper-tier contractor.
As part of the contractual risk transfer, the upper-tier contractor requires the lower-tier contractor's insurance policy to provide the required level of coverage (financing) on a primary and noncontributory basis. If the specific endorsements mentioned previously are attached—and the CG 20 01 is not necessarily required—this goal is accomplished.
The upper-tier contractor's use of a self-insured retention is meaningless to the lower-tier contractor regarding when and how its policy responds to a loss. A self-insured retention is nothing more than the financing mechanism the upper-tier contractor chooses to pay for their own liabilities, or those for which they are responsible.
The CG 20 01 includes the following requirements:
- The additional insured is a named insured under its own policy.
- The lower-tier contractor contractually agrees to provide coverage on a primary and noncontributory basis.
The first requirement is met if the upper-tier contractor is a named insured on its own policy, regardless of the self-insured retention. Assuming a contract exists that requires the lower-tier contractor to provide coverage on a primary and noncontributory basis, the second requirement is also fulfilled.
So, if 1) the upper-tier contractor is a named insured on its own policy; 2) the lower-tier contractor is liable, either legally or contractually; 3) the contract is in compliance with state law; and 4) all the requisite additional insured and waiver endorsements are attached, the lower-tier contractor's policy will pay on a primary and noncontributory basis—regardless of the self-insured retention.
Chris Boggs is executive director of the Big “I” Virtual University (VU).
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