Liability insurance policies typically contain a section known as the “other insurance” clause that defines how multiple insurers covering the same loss will pay relative to each other. A contributory policy shares the loss with other available insurance whereas a non-contributory policy will pay the claim on its own without seeking contribution from other available policies. Contributory versus non-contributory insurance is commonly at issue in contracts where risk is being transferred from one party to another.
Contractual Risk Transfer
Parties to a contract or agreement typically require one or the other to provide indemnity and insurance in the event of a loss. The indemnitor is the party who has accepted the obligation to indemnify, or protect and make whole, the other and also provide insurance to cover any potential claims. By introducing an additional insurance policy to pay claims, it becomes necessary to sort out which policy will first respond to a claim.
Common policy wording describes how the policy will respond to a claim in the event more than one insurance policy is available to the same insured. Frequently the policy will share the loss on a proportional basis with the other available insurance. Some policies may state they are excess and will only pay once all other policies have paid their limits of liability.
A non-contributory insurance policy contains wording specifying it will pay in the event of a covered claim and will not require other policies to share in the loss. Without specific non-contributory wording, ambiguity will be construed as the policy being contributory. Parties to a contract seeking to transfer the risk of loss require policies with specific non-contributory wording to protect their own policies from having to respond to claims.
Simply selecting a contributory or non-contributory policy does not eliminate all ambiguity in the event of multiple responding insurance policies. If a non-contributory policy does not state it is primary, meaning it will respond before any other available policy, a question continues to exist as to which policy will first respond to a claim. Therefore, it is necessary for policies to state they are both non-contributory and primary to ensure they will be the first to respond to claims.