We commonly hear words and statements we don’t understand but all too often we don’t take the time to look up the word or investigate the statement. Subcontractors are required by many owners and general contractors to provide insurance endorsements naming the owner/GC as “additionally insured primary and non-contributory.”
I found a great resource located on the Web at http://www.insurance-y2k.com/dictionary/uatdict.html. This site is a dictionary of insurance terms, which I used to dissect the meaning of the insurance endorsement additionally insured primary and non-contributory.
What are words for?
“Additionally Insured,” is defined as, “A person, company or entity protected by an insurance policy in addition to the insured.” When you additionally insure a contractor or owner you are giving them coverage under your insurance policy for free.“Primary Insurance,” is defined as, “Insurance that pays compensation for a loss ahead of any other insurance coverage the policyholder may have.” When you additionally insure an owner or general contractor as “primary,” your insurance will pay prior to any insurance the owner or GC may have.
“Noncontributory” is a term applied to employee benefit plans under which the employer bears the full cost of the benefits for employees. Noncontributory would then mean that the owner or general’s insurance “would not” contribute to an insurance claim and that only the subcontractor’s insurance would pay the claim or litigation costs.
Let’s pull the entire statement “additionally insured-primary and non contributory” together and define it once again:
• Additionally Insured: To insure the owner/GC for free.
• Primary Insured: To insure the owner/GC for free while allowing your insurance to pay a claim prior to the owner’s or general’s insurance.
• Noncontributory: The owner’s and GC’s insurance would not contribute to a claim or defend a claim.
Let’s change “additionally insured primary and noncontributory” into a simple sentence: “Subcontractors are insuring owners/general contractors under their own policies for free while protecting them and their insurance companies from claims without the owner/GC insurance companies contributing anything toward the defense of the claim or the claim settlement.”
Finally, let’s define the meaning as it applies to wall and ceiling contractors: “Wall and ceiling contractors are protecting our customers at great expense and risk to ourselves.”
As an example, say that an office building or home you worked on is having a water intrusion problem that is generating a lot of mold and mildew, and the occupants had to move out of the building. The cause is a construction defect. Those subcontractors on the project who provided additionally insured primary and noncontributory endorsements will be contacted and made to defend the owner/general contractors from the claim without the owner’s or GC’s insurance companies’ contribution. In other words, the owner and GC get to sit back and let our insurance defend and settle the claim.
The attorney fees generated in a case like this are astronomical—not to mention the costs to actually settle and make whole everyone affected by the claim. The problem as I see it is that we are providing free coverage to owners and GCs while having little control over the quality of work performed by other trades. We are not in a position to manage all the other trades working on the same project. We are not in a position to make sure the flashing subcontractor is using the proper materials, sizes, gauges, coatings or installation methods. However, if there is a claim, we will most likely be involved because the water intrusion has affected all parts of the building.
Is it fair or reasonable for your company to be named in a lawsuit when in fact your company had nothing to do with the product or service that caused the initial water intrusion?
Scanners
I’ve racked my brain trying to justify why we subcontractors should provide free insurance to our customers. Giving away insurance coverage while accepting additional liability is difficult to swallow. If your company is named in a defect claims case, your insurance company will start spending money right away on behalf of the owner and GC in order to defend them. All the money they expend in defending such claims continues to reduce the balance of coverage you have. In other words, if you have $1 million in coverage the amount of money spent on attorney fees reduces the $1 million worth of coverage by the amount of the attorney’s fees.Once all the attorneys are done and everyone is ready to settle, you will most likely have contributed a fair amount of money just in defense costs even if you are found not guilty in the actual defect claim. In simpler terms, if you’re proven innocent, then your insurance company spent a ton of money determining your innocence. If found guilty or partly guilty, then your insurance will pay attorney fees and settlement costs. I want to stress the importance of being sure that your insurance limits are high enough to cover both the attorney fees and settlement costs while keeping in mind that your insurance is also defending the owner/GC.
What is the owner’s and GC’s exposure when we subcontractors insure them? I don’t know. It would seem to me that the subcontractors insurance is going to take care of everything unless it is proven that the owner or GC is negligent in the claim. Keep in mind that our insurance company is paying a team of lawyers to defend us while our customer is busy bidding more work and being productive.
The point is that subcontractors are insuring owners and GCs at the subcontractor’s expense and liability by providing additionally insured primary noncontributory endorsements. The subcontractor is losing on two fronts. First, we are insuring our customers for free while taking on additional risk. Second, we are driving up the cost of subcontractor insurance because every time there is a claim, it is going to involve subcontracting insurance. The insurance industry begins to look at subcontracts as if subcontractors are the cause of all defect claims. The only contractor on the job that has the ability to control the quality of all trades is the owner/GC and not the individual subcontractors.
It is so important for us to stop insuring owners and GCs unless they are willing to pay for it. If an owner or GC wants the standard additionally insured endorsement, that means they will be equally involved in a defect claim. I would agree we should provide that and only that type of endorsement.
We are throwing our insurance coverage around as if it was nothing. Not only do we have to be low bid on a job, we have to insure the owner/GC for the privilege of doing the job. Shouldn’t the owner/GC and architect insure your company from poor management, lack of quality control and poor designs? Heck yes!
Maybe the design of the building attracts high-flying space aliens who want to do some gamma-ray target practice while we’re inside working. Maybe the owner/GC picks a roofing or window subcontractor whose bid is so low that they knowingly provide inferior products and labor. Maybe the owner or GC self performs some of the work that leads to a construction defect. Wouldn’t it be reasonable for the owner/GC to give us a certificate of insurance naming us as additionally insured under their policy?
Fair allocation of risk is not making the subcontractor insure the owner/GC. Fair allocation of risk is having the owner/GC and their insurance companies equally at risk with us.
When bidding your next job, try excluding primary noncontributory insurance and provide only additionally insured endorsements. You could then provide an added price for a primary noncontributory endorsement. We subcontractors are going to be discomfited financially if we continue to give away our insurance.
My explanation or definition of additionally insured primary and noncontributory may be somewhat different than an attorney or insurance company, however it is my definition and it’s what I believe to be accurate.
For those of you who have insurance but are not required to name your customer as additionally insured, don’t feel as though you’re not paying for the privilege. You’re paying for it but at least your customer is equally involved in the litigation process.
Remember: Teamwork begins with a fair contract! W&C
