It is natural, some might even argue necessary, to think of ourselves as primary, as number one, both in our personal and professional relationships. But where do you stand in your insurance relationships?
What we're talking about is the commercial general liability insurance concept of "Primary and Noncontributory" (PNC), a ubiquitous term built on shifting sands with a history of legal dispute and case law ambiguity. This is not surprising considering that the phrase is rarely defined in either an insurance policy or the underlying contract.
The story starts by recognizing that PNC concerns additional insured coverage. Being an additional insured means that I am required to purchase liability insurance and include you on my policy as an additional insured. To this, you then require that the coverage must be PNC.
Primary and Noncontributory is commonly used in contracts to stipulate the order in which multiple policies are liable for the same loss. For example, a contractor does work for a building owner. In the event of a claim, the contractor's policy would pay before other applicable insurance and would not seek contribution to the claim from other policies. There are two parts to PNC:
Of course, it is no surprise that the insurance companies would want the other policy to pay first and to limit their own exposure. This has led to a lot of business for attorneys. In an effort to bring better order to the inevitable argument, in 1997 new language included in forms issued by Insurance Services Office (ISO) established that if you were an additional insured on my policy, my insurance policy would pay first (primary) and your insurance policy would pay second ("excess").
But this arrangement works only if both policies and additional insured endorsements are written on the same modern ISO forms. In such cases, primary and noncontributory do not need to be specifically required as the necessary language is built-in. However, non-ISO forms (and there are many) contain their own wording that could completely alter the priority of coverage.
PNC further becomes problematic when a construction contract requires a subcontractor's insurance to name the owner or general contractor as an additional insured on a PNC basis. This is done because the owner or general contractor wants the sub's insurance to be the primary source of recovery, thereby not using her own policy unless the sub's policy limit is exhausted.
The issue with this demand is that it is not standard insurance industry practice to do so. The reluctance of insurers stems from their desire to have the additional insured's coverage contribute toward payment of the loss. The owner or general contractor wants to see proof that the subcontractor has complied, yet insurance agents can only add wording to a certificate of insurance if the insurance company approves it.
This bind can cause the subcontractor to be unable to start the project and has become a flashpoint for controversy among insurance professionals regarding the misuse or overuse of the PNC requirement. One well-regarded trade organization, The International Risk Management Institute, has gone so far as to recommend that risk managers not include the PNC requirement in contracts.
The pull of competing forces around the PNC debate involves the efforts of insurance agents to protect the interests of their clients, the desire of higher-tier parties to avoid liability, and the natural inclination of insurance carriers to seek recovery through subrogation. There seems to be some inherent irreconcilability to all this. As stated earlier, everyone wants to be number one, but how do you do that?
And therein lies the problem.