Exhaustion of Limits: Named Insured and Additional Insured

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There are basically 2 types of “exhaustion” scenarios when you look at the insurance programs of the Named Insured versus the Additional Insured. A typical example is where a Subcontractor (Named Insured) is asked to add the General Contractor to their policy as an Additional Insured. Indeed, the General Contractor, and Additional Insured in this case, would expect a “vertical exhaustion of limits” scenario:

  • Subcontractors GL Policy
  • Subcontractors Umbrella Policy(ies)
  • General Contractors GL (if needed)
  • General Contractors Umbrella (if needed)

However, with an unendorsed Umbrella/Excess policy, the “Other Insurance” clause may present a problem. These clauses may state that the policy will respond as excess coverage over scheduled underlying insurance (such as the Named Insureds CGL) and any other available insurance (such as the Additional Insureds CGL), creating a “horizontal exhaustion of limits” scenario:

  • Subcontractors CGL
  • General Contractors CGL
  • Umbrella Policies of both

There are two solutions to the “horizontal exhaustion” problem.

Contract Language:

“Each policy, including umbrella/excess, shall state that the insurance provided to the additional insureds is primary and noncontributory to any other insurance (including primary, excess, self-insurance, or on any other basis) available to the additional insureds.”

Then have the Subcontractors insurer add “Primary and Noncontributory” language to its umbrella/excess policy.

Insurance Policy Language:

Have the insurer of the Subcontractor endorse the umbrella/excess with a Priority of Coverage endorsement, which reads something like this:

“Any entity qualifying as an additional insured on the insurance stated on the Schedule of Underlying Insurance shall be an additional insured on this policy. This insurance shall apply immediately upon exhaustion of the insurance stated in the Schedule of Underlying Insurance as respects the coverage afforded to any additional insured. This insurance shall apply before any other insurance available to the additional insured, on which the additional insured, whether such other insurance is primary, excess, contingent, or on any other basis, and we will not contribute from such insurance for defense or indemnity.”

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Portions reprinted from the International Risk Management Institute.

Please note that the information contained in this posting is designed to provide general awareness in regard to the subject matter covered. It is not provided as legal, medical, or tax advice, nor is it intended to address all concerns in your workplace or for public health. No representation is made as to the sufficiency for your specific company’s needs. This post should be reviewed by your legal counsel or tax consultant before use.