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What does it mean when the vendor’s insurance becomes the primary insurance?

Attorney John Goede | GD&C Law: Florida Attorneys and Professional Counsel

Q: We were recently advised that all of our contracts should include a requirement that the vendor’s insurance be primary insurance.  What does this mean?

H.H., Bonita Springs

A: This is a great question that could take up the entire column.  If an Association vendor is negligent and a resident is injured, there will obviously be demands for damages.  More importantly, the injured party will probably sue the Association even if the Association was completely innocent in the matter.  In such a situation, the Association has insurance and so does the vendor, but many contracts require the vendor to carry insurance that names the Association as an “additional insured” and, more specifically, that the insurance is primary.  This effectively means that the contractor’s insurance is the equivalent of the Association’s insurance.

If the Association’s contract with the vendor is not drafted with the appropriate insurance requirements, the vendor’s insurance carrier will refuse to cover the Association because the Association is not a beneficiary of the insurance policy – only the vendor is a beneficiary.  To complicate the matter, most policies have a “contracted for exclusion” which also means that the vendor’s insurance would not cover indemnification required under a separate contract with the Association.  This means the Association will have to file a claim under its own insurance (with a potential high deductible) and premiums may increase.

To solve the above dilemma, your contract with the vendor will be significantly stronger if the Association requires vendors to both a) name the Association as an additional insured party; and b) require that the vendor’s insurance be primary insurance.  This is a complicated issue and not well understood by many clients or contractors, and thus I would recommend that you have the contract and the policy reviewed by your insurance broker and/or attorney for analysis and recommendations

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