Dealing with contracts and insurance requirements can be tricky business. Things can get especially dicey when dealing with contractual liability exclusions, additional insureds, “insured contracts” and other intricacies of the contract process.
Contracts are notoriously fertile ground for costly surprises down the road.
Mistakes at this stage of the game can end up costing you big later, so it’s a good idea to be acquainted with contractual liability exclusions.
What are Contractual Liability Exclusions?
While a standard Commercial General Liability (CGL) policy protects a business from many of the risks it faces during day-to-day operations, it will always have exclusions. One such exclusion is the Contractual Liability Exclusion to Coverage A-Bodily Injury or Property Damage. This exclusion eliminates coverage for “bodily injury” or “property damage” for which an insured is required to pay damages by reason of assumption of liability by contract or agreement.
“Assumption of liability by contract” is the operative phrase. It means the insured has agreed to take on responsibility for another person’s or organization’s liability for injury or damage. Of course, that’s done through a hold harmless or indemnity agreement, with one party indemnifying another party for any injuries, accidents or losses that may occur while the contract is in effect.
The CGL’s Contractual Liability Exclusion generally goes on to state that the exclusion doesn’t apply to liability assumed in an "insured contract.”
What does “insured contract” mean?
The standard CGL policy offers multiple definitions for "insured contract,” and the exact definitions may change from policy to policy, but often it will include: “Insured contract means … that part of any other contract or agreement pertaining to your business under which you assume the tort liability of another party to pay for 'bodily injury' or 'property damage' to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement."
Bottom line: if the contract between the parties satisfies the definition of “insured contract,” then contractual liability should be covered under the standard CGL policy.
But there’s another twist that can come into play…
Some policies are amended by a Contractual Liability Limitation Endorsement that alters the definition of "insured contract" by deleting the provision above. When this happens, the insured may have difficulty obtaining coverage for liability assumed in a contract. And that could expose a business to a risk it expected to be covered. To protect yourself, it should be stipulated in the “insurance requirements” section of any contract that no such endorsement will be accepted.
The moral of the story: Get it in writing. All of it.
It should go without saying that every contract you enter into needs to have every detail spelled out, clearly and concisely. It’s not uncommon for indemnity agreements to get buried deep in the insurance requirements section of a contract, which only confuses things and can lead to nasty surprises later on.
Do you need Contractual Liability Insurance?
Maybe or maybe not. The contractual liability insurance coverage provided by most standard CGL policies should cover you for hold harmless or indemnity agreements found in an "insured contract." On the other hand, if an indemnity agreement isn’t considered part of an "insured contract," the CGL policy may not respond. That means you’ll need other coverage, and Contractual Liability Insurance fills that gap.
Your best defense against costly surprises? A knowledgeable insurance partner.
When you partner with Higginbotham for your business insurance, we’ll check that your contracts have you covered for the liability you’re assuming. We’ll also make the process simple for you. Contact our contract review team today for more information.