Coverage Corner

HORIZONTAL OR VERTICAL – NOT JUST A GEOMETRY QUESTION!

By Cathy Trischan

What do geometry and insurance have in common? The answer is that understanding horizontal vs. vertical is important in both!

Imagine that your insured subcontractor has just signed a contract agreeing to provide $5,000,000 commercial general liability (CGL) coverage and to include the general contractor as additional insured. Furthermore, coverage for the general contractor needs to apply on a primary and noncontributory basis. This is easy enough to do on the subcontractor’s CGL policy. Insurance Services Office (ISO) has a number of additional insured endorsements and a

Primary And Noncontributory –Other Insurance Condition (CG 20 01 12 19) endorsement that can be added. The problem is getting the $5,000,000 CGL limit. Most insurers do not offer a $5,000,000 policy, and the subcontractor is likely carrying a $1,000,000 or $2,000,000 CGL with an umbrella or excess liability policy to make up the difference. Many contracts allow one to meet the limits requirement with a combination of policies.

While primary and noncontributory language has been added to the subcontractor’s CGL, the subcontractor’s umbrella, like most, states that its coverage is excess over and shall not contribute with any other insurance. To complicate matters, the general contractor’s CGL states it is excess, but only to the subcontractor’s primary insurance to which it has been added as additional insured. The general contractor’s CGL does not make itself excess to the subcontractor’s umbrella because the subcontractor’s umbrella is not primary insurance. So which policy should pay after the subcontractor’s CGL – subcontractor’s umbrella or general contractor’s CGL?

Courts in states that have addressed this issue using standard CGL and umbrella/excess liability language, have produced two basic interpretations. Here is where the geometry comes in.

Horizontal exhaustion of limits – With this approach, the subcontractor’s CGL pays first, then the general contractor’s CGL, then the umbrella policies. This interpretation is supported by the other insurance clauses in the CGL and most umbrellas but does not reflect the intent of the parties as expressed in the contract.

Vertical exhaustion of limits – With this approach, the subcontractor’s CGL pays first, then the subcontractor’s umbrella, then the general contractor’s policies. This interpretation reflects the intent of the parties but is not supported by the other insurance clauses in the CGL and most umbrellas.

To solve this problem and to ensure that a vertical exhaustion of limits approach is applied, many general contractors and other additional insureds demand that primary and noncontributory language be added to umbrella and excess liability policies as well as to the CGL. Many insurers have their own endorsements to do this, but ISO did not have standard forms that could be used by insurers who hadn’t created their own forms. Not until recently, that is!

ISO introduced endorsements for use on its umbrella and excess liability policies. The title is Noncontributory And Order Of Response – Other Insurance Condition. The umbrella form number is CU 24 77 12 23, and the excess liability form number is CX 24 32 12 23. Both do the same thing. If the named insured has agreed in writing in a contract or agreement that its coverage will apply before any other insurance available to the scheduled additional insured and not seek contribution from such insurance, then the named insured’s policy will do just that. It will provide coverage that is primary and noncontributory to any policy on which the additional insured is a named insured. Going back to our general contractor and subcontractor, the subcontractor’s umbrella now provides coverage for the general contractor that is primary and noncontributory to the general contractor’s own CGL.

There is one more step to make sure all works as intended. Recall that the general contractor’s CGL only made itself excess to any other primary insurance to which the general contractor was added as additional insured. ISO has introduced a CGL endorsement to remedy this, Excess Insurance Provision – Order Of Response – When You Are An Additional Insured On Other Insurance (CG 24 56 12 23). Adding this endorsement to the general contractor’s CGL now makes that CGL excess over any other insurance for which the general contractor has been added as additional insured. In other words, the general contractor’s CGL is excess over the subcontractor’s umbrella.

These ISO endorsements are a welcome relief for insureds who have agreed to provide primary and noncontributory coverage on umbrella or excess liability policies, but whose insurers had not created endorsements to do that. These forms ensure that vertical exhaustion will apply.

Now that this problem is solved –geometry anyone?

Til next time!

Cathy Trischan, CPCU, CRM, CIC, ARM, AU, AAI, CRIS, MLIS, TRIP is IA&B’s commercial lines education consultant. She works with our CIC and CISR programs, as well as our live CE webinars. Catch her at one of our upcoming courses: IABforME.com/education