Most Umbrella Policies Don’t Follow the Primary and Noncontributory Conditions

Insurance requirements imposed upon construction industry policyholders typically stipulate that the named insured must provide liability insurance with a minimum limit of $5 million (more or less) and that the liability insurance must protect the owner and general contractor (or landlord, lessor, distributor, etc.) as additional insureds on a primary and noncontributory basis. It is also typical for insurance requirements to state that the full limit may be satisfied by a combination of general liability insurance and excess or umbrella insurance. 

What may not be evident is that the additional insured expects coverage on a primary and noncontributory basis for the full limit—all $5 million. In other words, if the named insured elects to purchase general liability coverage with a $1 million limit and umbrella with a $4 million limit to fill out the $5 million required minimum limit, the additional insured still expects all $5 million will apply on a primary and noncontributory basis. 

For purposes of this article, assume that the named insured opted for the $1 million general liability policy, supplemented with a $4 million umbrella policy in lieu of one liability policy with a $5 million limit. 

Primary and Noncontributory General Liability

Primary and noncontributory is insurance jargon for the order in which the policies will provide coverage to the additional insured. When the additional insured mandates that the named insured’s general liability insurance will provide the $1 million of protection on a primary and noncontributory basis, here is the desired outcome:

The named insured’s general liability policy will respond first (primary) to protect the additional insured by defending and paying damages on behalf of the additional insured. In addition, the named insured’s general liability insurer agrees not to compel the additional insured’s own general liability insurer—the general liability policy on which the additional insured is a named insured—to share in the payment of defense costs and damages. The agreement not to pursue in the sharing of the payments is known as noncontributory—the insurer has agreed to not seek contribution, even if they would otherwise have a right to do so.   

It is becoming more commonplace for insurers issuing general liability policies to change the policy’s other insurance condition to expressly state that coverage provided to an additional insured, if required in writing, will be on a primary and noncontributory basis. Insurers using Insurance Services Office, Inc. or ISO policy forms typically use the ISO endorsement titled “Primary and Noncontributory – Other Insurance Condition,” CG 20 01 04 13, even though the order of coverage would be exactly the same without CG 20 01 if the two general liability policies used the standard ISO other insurance condition. Many insurers use proprietary forms, usually as part of a proprietary additional insured endorsement, which specify the primary and noncontributory coverage will apply to an additional insured.  

Primary and Noncontributory Umbrella 

Recall that the additional insured requires primary and noncontributory coverage to be in effect for the full limit of $5 million, despite the fact that the additional insured permitted the named insured to comply with the limit by a combination of a general liability policy with a $1 million limit and an umbrella policy with a $4 million limit. In any event, the desired outcome is:

If the damages for which the additional insured is legally liable exceed the $1 million general liability limit, the additional insured expects the umbrella policy of the named insured to be next in line to protect the additional insured. And further, the umbrella insurer of the named insured will not pursue the payments from any policy issued to the additional insured as a named insured. 

The Complication

Herein lies the problem—the reality is that most umbrella policies conditions expressly state the umbrella policy is excess over any other insurance. 

Instead of the desired outcome, the named insured’s umbrella insurer asserts that its policy will pay damages on behalf of the additional insured only after the additional insured’s own general liability policy exhausts its limits. Further, the named insured’s umbrella insurer has made it plain it will share any damages it owes with the additional insured’s own umbrella policy. 

This is clearly not the desired outcome and likely violates the insurance requirements the named insured agreed to with the additional insured. What went wrong?

A Closer Look at Umbrella Policies

If you are in the “this won’t even happen to me” camp because you believe your umbrella policies follows form the underlying primary and noncontributory verbiage, you may want to reassess. 

The Umbrella Insuring Agreement

First, review the umbrella policy insuring agreement to determine if the policy is a stand-alone umbrella or a follow-form umbrella. Or see if your umbrella policy is the increasingly popular “bifurcated” umbrella that combines two insuring agreements—Coverage A and Coverage B. Coverage A is typically follow-form; Coverage B is typically stand-alone umbrella. 

A Stand-Alone Umbrella Insuring Agreement

The insuring agreement of a stand-alone umbrella typically makes no reference to the terms and conditions of any of the underlying insurance. That is because the insurer is not making a broad promise to follow the terms and conditions of the underlying insurance. In certain circumstances, a stand-alone umbrella policy may follow the terms of the underlying coverage over a specific exposure. For example, umbrella policies commonly exclude liquor liability exposures, but also stipulate, within the liquor exclusion, that the liquor exclusion will not apply if valid underlying liquor liability insurance exists. Coverage in the umbrella policy will then follow the same provisions, exclusions and limitations that are contained in the applicable underlying liquor liability insurance. However, aside from following the underlying insurance for a few exposures explicitly specified in the policy exclusions, the stand-alone umbrella policy coverage does not adopt the terms and conditions of the underlying policies.

A Follow-Form Umbrella Insuring Agreement

In contrast to the stand-alone umbrella, the follow-form umbrella insuring agreement typically incorporates by reference the underlying insurance. For example, a typical insuring agreement of a follow-form umbrella promises the coverage will adopt the terms and conditions of the underlying insurance. But this promise is always limited by additional wording—such as “to the extent that such provisions differ or conflict” or “unless a term or condition contained in this coverage differs from underlying insurance.”  In all such instances, the insuring agreement stipulates that if the provisions or terms and conditions conflict or differ with the umbrella terms and conditions, the umbrella policy terms and conditions apply. 

The Umbrella Other Insurance Condition

After a review of the umbrella policy insuring agreements, it should be evident that the policyeither a stand-alone umbrella or a follow-form umbrella (or if a combination of both)—does not adopt and follow all the terms of the underlying insurance. 

Second, review the umbrella policy to see if it includes its own other insurance condition, which is almost certain to be the case. If an umbrella policy adopted the other insurance condition of an underlying policy, then the umbrella would become something it is not designed to be—primary coverage. And so, it is axiomatic that umbrella policies do not follow the other insurance condition of any of the underlying policies.

The inescapable result is that an umbrella policy will have its own other insurance condition. Here is the point—an umbrella insurer, with either a stand-alone or follow-form policy, does not agree to follow a different other insurance condition simply because the underlying general liability other insurance condition has been changed to include primary and noncontributory wording. Instead, the umbrella insurer intends to rely on the other insurance condition written into the umbrella policy. The typical umbrella other insurance condition states the umbrella policy is excess of any other insurance, including sitting excess of the general liability policy on which the additional insured is a named insured. 

Conclusion

Despite passionate insistence that your umbrella policy follows the primary and noncontributory wording found in a general liability policy, that is rarely, if ever, the case. However, after this closer look at the workings of primary and noncontributory in the context of the umbrella, it becomes manifest that to arrange the general liability and umbrella policies to apply in the agreed upon order, additional action is necessary. 

Umbrella insurers are willing, in come cases, to amend their policy to specifically amend the policy’s other insurance condition to create the order of coverage required. In fact, some insurers have the appropriate wording automatically built in to their umbrella policy form. Consider the following wording found in a Travelers umbrella other insurance condition:

"This insurance is excess over any valid and collectible ‘other insurance’…However, if you specifically agree in a written contract or agreement that the insurance provided to any person or organization that qualifies as an insured under this insurance must apply on a primary basis, or primary and non-contributory basis, then this insurance…will apply before any ‘other insurance’ that is available to such additional insured which covers that person or organization as a named insured and we will not share with that ‘other insurance’ …" 1

Once umbrella insurers understand the order of coverage needed will not result in a drop-down below the listed underlying policy limits, which is often expressed as a concern, the more likely the umbrella insurer will be amenable to providing wording similar to the Travelers wording above. AmWINS Construction brokers are well versed in this issue and will work to ensure that excess programs provide the appropriate primary and noncontributory language.

Sources

1Travelers Excess Follow-Form and Umbrella Liability Insurance EU 00 01 07 16