For “additional insured” coverage to accomplish the desired risk transfer, the primary and any excess or umbrella policies should state their coverage is primary and non-contributory with any other insurance available to the additional insured. A recent ruling in state court in Michigan reinforces this notion.

A construction contractor entered into a contract requiring it to make its customer an additional insured on its general liability policies, which also had to be endorsed to state “they are primary and not excess over or contributory with” any other insurance available to the customer.

This type of requirement is common in construction contracts. Upstream parties want to transfer risk to downstream parties and their insurers. In this instance, the customer was the project owner and transferred risk to its contractor’s insurers. Similar arrangements are common in other contracts, such as commercial real estate leases and product distribution agreements.

The contractor had the required coverage. Its commercial general liability policy, with a $1 million limit, included an additional insured endorsement stating, “this insurance will be primary without contribution from such other insurance available to the additional insured” when the contract so required. The company also purchased an umbrella liability policy with a $20 million limit. The umbrella policy’s additional insured endorsement stated, “[c]overage provided to these additional insured parties, when required by written contract, will be primary to, and non-contributory with, any Other Insurance purchased and issued to that person or organization.”

When the customer incurred a $6 million jury verdict as a result of a construction accident, the contractor’s primary insurer paid its $1 million limit on behalf of the customer. The umbrella carrier, however, refused to pay the remaining $5 million, contending that the customer’s own primary policy was next in line. Asserting that an excess or umbrella policy can never pay before a primary policy, the umbrella insurer argued the primary and non-contributory provision of its policy applied only as to other excess or umbrella policies.

The Michigan court rejected the insurer’s position and upheld the plain language of the umbrella policy, making it primary to and non-contributory with the customer’s own policies.

Key Takeaways

There are several valuable lessons for any company whose contract requires it to either provide or receive coverage as an additional insured.

1. For a true transfer of risk, the contract should specify that the “additional insured” coverage is primary and non-contributory with any other insurance available to that party
2. It is important to confirm that the policies – including excess or umbrella policies – satisfy these requirements of the contract
3. If the insurance company refuses to pay for a loss until some other policy is exhausted, carefully review the policy again and consider whether the insurer may be wrong about its own policy

This ruling is an important win for any business that is contractually required to make its customer an additional insured on a primary and non-contributory basis. If the insurance company had prevailed on its argument that an excess or umbrella policy can never pay before a primary policy, then it might have become impossible for a contractor to comply with its contract. That would frustrate the risk transfer to which both parties agreed and for which the contractor paid a premium.