When a business receives a contract with insurance information included or a request for a certificate of insurance, it probably seems like it is written in a different language. The easiest thing to do is send it to the person that speaks that language: your insurance broker.
Have you ever wondered what some of those words on the request mean, and why you sometimes have to pay extra (up to $1,000 or more) when a certificate request passes your broker’s desk? We’re going to examine two increasingly common requests, primary & noncontributory wording and waiver of subrogation, to find out more.
The Terms Defined
Despite the fact that there are two separate phrases, there are actually three definitions at work here, and combined they can take a toll on your insurance coverage. So what do they mean?
Primary & noncontributory is a phrase that usually appears together and refers to any type of liability insurance (Commercial General Liability, Automobile Liability, Workers Compensation and others). The “primary” portion means that the insurance policy to which the word applies will be the primary or first policy to pay out in the event of a claim.
The “noncontributory” portion means the insurance policy to which the word applies will be the only policy available to pay the claim. This policy will not require any other policy available to contribute to payment of the claim.
To define a waiver of subrogation you must first understand the term “subrogation”. Subrogation is the right of one party to substitute for another. In the world of insurance, if a claim is paid out by the insurance company, subrogation allows for the insurance company to step into the shoes of the insured and sue any available third party for any relief available to recoup payment made on the claim. A waiver of subrogation waives the right of the insurance company to do this before work even starts.
How These Terms Affect Your Policy
Both endorsements extend the coverage of the policy to other entities and keep the insurance company from recovering funds available from any other party to a claim. This can affect your bottom line in the event of a claim.
A client of Hayes was contracted to repair a hospital after a car had run through the wall of the building. The contractor was working one afternoon and the hospital security guard drove by. The security guard drove up on the sidewalk near where they were working and lost control of his vehicle, running over not only the building materials being used, but also hitting one of the contractor’s employees, breaking his leg.
The subcontractor had provided primary & noncontributory and waiver of subrogation to the hospital, so the $40,000 employee injury claim for workers compensation AND the claim for damage to building materials were paid by the contractor’s insurance with no contribution by the hospital insurance for damages and injury caused by the hospital employee.
Primary & noncontributory wording in a certificate request changes the relationship between the general contractor (GC) and the subcontractor when it comes to claims. The subcontractor’s insurance becomes the primary insurance on that part of the job. Even if the GC contributed to an incident in some way the insurance company cannot require the GC’s insurance to contribute to the claim.
Waiver of subrogation on the policy acts in much the same way as the noncontributory endorsement. If there is a claim and the insurance company pays out on your behalf, you are waiving the right of the insurance company to try to go after a third party who may also be liable in the claim. In the above example, even without primary & noncontributory wording the subcontractor has waived the right of the insurance company to recover anything from the contractor who may have contributed to the claim.
What You Can Do
Some contractors ask for the moon because they can get it. You sign a contract because you want the work, and worry about the details later. However, the best time to negotiate a contract is before it is signed. If the insurance carrier is unable to recover losses from another contributing party, the entire claim falls on your record and affects your future insurance premiums and possibly even your ability to secure reasonably priced insurance.
Your first line of defense should be to talk to your insurance broker and a qualified contract attorney prior to signing the contract. Review the terms of the agreement and any work that needs to be done to see if either endorsement is necessary for the type of job you will be doing. You may find that these endorsements may not be required. This alleviates the burden on your insurance carrier and the impact on your future insurance premiums.