Most construction contracts require the general contractor to purchase commercial general liability coverage to provide assurances that the contractor has the means to pay for liability arising out of its construction activities.

Contractual liability coverage is insurance that is intended to cover the risk found in most construction contracts and subcontracts where one party agrees to hold another party harmless from liability for claims from third parties; generally where the claim is the responsibility in whole or in part is caused by the indemnifying party.

A contractual liability policy includes a loss sustained that is covered by a warranty included in the contract. In a perfect world a contractor would read and understand every part of its CGL policy, unfortunately, that is rarely the case. In many cases, the first time a policy is given an in-depth review is when an occurrence, incident or claim has occurred, and the contractor is trying to determine if it is “covered.” When evaluating coverage, one should consider first the initial grant of coverage, then look at any exclusions to coverage, followed by any exceptions to those exclusions.

Contractual liability insurance has been automatically provided within the standard CGL policy since 1986. Coverage for contractual liability is largely eliminated in the typical CGL policy by an exclusion for assumption of liability in a contract or agreement. A standard ISO CGL form CG 00 01 includes a number of standard exclusions for bodily injury and property damage liability including:

• expected or intended injury;
• contractual liability;
• liquor liability;
• workers’ compensation;
• employer’s liability;
• pollution;
• aircraft, auto or watercraft;
• mobile equipment
• war;
• damage to property;
• damage to the product;
• damage to the work;
• damage to impaired property or property not physically injured;
• recall of products, work or impaired property;
• personal and advertising injury;
• electronic data; and
• recording and distribution of material or information in violation of law.

A contractual liability exclusion generally operates to bar or deny coverage of personal injury and property damage claims for which an insured is obligated to pay by reason of the assumption of liability in a contract or agreement, when an insured takes on liability for the conduct of a third-party. Think about indemnity clauses, an indemnity clause is an assumption of liability and commonplace in most construction contracts.

There are two very important exceptions to the contractual liability exclusion. The first, is that the contractual liability exclusion does not apply to liability for damages that “the insured would have in the absence of the contract or agreement.” Think tort claims. The second, is that the contractual liability exclusion does not apply to liability for damages “assumed in a contract or agreement that is an ‘insured contract.’” The key here is the term “insured contract,” which is defined later in the policy.

“Insured contract,” as defined in Section V(9) of ISO form CG 00 01 04 13, means:

(a)a contract for a lease of premises (but not for a promise to pay fire damage to a premises being rented or occupied);
(b)a sidetrack agreement;
(c)any easement or license agreement (except in connection with construction or demolition on or within 50 feet of a railroad);
(d)an obligation to indemnity a municipality (except in connection with for work for the municipality)
(e)an elevator maintenance agreement; and
(f)“That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) 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 the contract or agreement.”

Paragraph (f) was added in 1986 and is meant to extend coverage to any contract pertaining to the named insured’s business under which they assume the tort liability, indemnification, of another.

Contractors should carefully review, or seek assistance to review, their policies because there are endorsements to CGL policies that modify the definition of “insured contract.” One such modification is to remove paragraph (f) entirely, which would result in contractual indemnification claims being excluded from coverage, resulting in uninsured indemnification obligations.

Another common modification is to alter the language of the endorsement as follows (changes in bold):

that part of any other contract or agreement pertaining to the business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization, provided the bodily injury or property damage is caused, in whole or in part, by you or those acting on your behalf. With this modification, if you agree to indemnify another for that person’s negligence, it would not meet the definition of “insured contract” resulting in uninsured indemnification obligations.

Modification such as these should be unacceptable to every party in the construction project, owners, contractors, subcontractors and so on. From an owner’s perspective an uninsured indemnification obligation from a general contractor would expose the owner because the grant of indemnity is only as solid as the financial capabilities of the general contractor. From a general contractor’s perspective, such modifications from the ISO for CG 00 01 leaves it self-insuring the indemnification obligations. For the reasons discussed above, it is important that a contractor not only carefully reviews its own commercial general liability policy to ensure the definition of “insured contract” is broad form or unmodified, it is also important that the implemented subcontract agreements are drafted to ensure the subcontractors obtain commercial general liability policies that include board form, unmodified definitions of “insured contract” to avoid any uninsured indemnity obligations.