November 2006 - General Liability Insurance: Questions Answered
By Blake Johnson

If you are a subcontractor, signing subcontract agreements is a common occurrence. If you are the developer/builder, requiring these subcontract agreements is a common occurrence. From an insurance perspective, one section in these contracts is extremely important to both parties and should be reviewed thoroughly (aside from the section that outlines the insurance requirements.) This section is the Indemnification/Hold Harmless provision.

This article is not a legal analysis of subcontract agreement language. That would be a complicated discussion given the variations in this language from one contract to another and certainly one better addressed by a legal professional. What this article attempts to address is where insurance coverage is found (or not) for the obligations spelled out in the Indemnification/Hold Harmless section of almost every contract.

If you are the developer/builder, you need to make certain that your subcontractors have the needed coverage. If you are a subcontractor, you need to make certain that you have the needed coverage so not to be taking these obligations on personally and without the backing of insurance.

One of the most mysterious insurance policies you will ever purchase is the Commercial General Liability Policy or CGL. At the same time, it is one of the most important in terms of providing protection for you and your company. Because there are a number of different CGL policies in use today, these comments will be directed to the ISO CG 00 01 12 04 policy.

You may be familiar with the term “Contractual Liability.” This is the liability you assume in a contract and typically refers to those obligations you accept in contract to indemnify and hold harmless another party. A common insurance requirement is for Blanket Contractual to cover the obligations found in the Indemnification section of the contract. The reality is that Contractual Liability is actually an exclusion in the CGL policy. This exclusion reads:

    “This insurance does not apply to: “bodily injury” or “property damage” for which the                     
    insured is obligated to pay damages by reason of the assumption of liability in a contract or          
   agreement.”

There is however, an exception to this exclusion that provides coverage for liability assumed in a contract provided it is an “Insured Contract” and provided the bodily injury or property damage occurs after the contract has been executed. The issue then is one of what is an “Insured Contract?” The CGL policy defines an Insured Contract. While there are a number of agreements that fit the definition, the one pertinent to this discussion is:

    “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.”

This rather broad definition is then narrowed down to what is not covered within this Insured Contract:

• A contract that indemnifies a railroad arising out of construction within 50 feet of any railroad property
• A contract that indemnifies an architect, engineer or surveyor for damage arising out of the preparing, approving, or failing to approve maps, shop drawings, opinions, reports, field orders, change orders, drawings or specifications
• A contract under which the insured (you), if an architect, engineer or surveyor, assumes liability for injury or damage arising out of the insured’s (your) rendering or failure to render professional services

To the extent outlined above, there is coverage under a CGL policy for the obligations taken on in contract to indemnify and hold harmless either the general contractor or developer/builder depending on with whom you are contracting. There are however, some important limitations you need to understand.

• VERY IMPORTANT – Protection is provided, but only to the extent coverage is granted under the policy. As an example, the CGL policy ONLY responds to claims of bodily injury and/or property damage. In many (most) cases the scope of the indemnification language goes beyond just indemnification for bodily injury and property damage claims.
• A CGL policy excludes pollution related claims, therefore, no coverage if you agree to indemnify and hold harmless a third party for claims of this type or nature.
• A CGL policy excludes professional liability as outlined in the previous bullet item list of what is not covered within the Insured Contract.
• Expanding on the railroad site exclusion description, a CGL policy excludes coverage from claims arising out of work within 50 feet of any railroad property. A new requirement of many railroads (if you are working on or within 50 feet of their property) is to have the exclusion deleted, in addition to providing a Railroad Protective policy. Many insurance carriers will not delete this exclusion.

As the insurance industry continues to struggle with the very real long-term liability issues associated with residential construction more and more carriers are looking for ways to provide coverage, but at the same time limit their liability in certain key areas. These are typically those areas that involve litigation and the costs associated with defending claims.

As you might imagine, an insurance carrier could significantly reduce their liability if they made the decision not to participate in the defense of an indemnification obligation taken on in contract by their insured. This is exactly what several insurance carriers have done. This is accomplished by adding to the CGL policy a “Contractual Limitation Endorsement.”

The Contractual Limitation Endorsement amends the definition of an Insured Contract to NOT include construction contracts. Unfortunately, for some subcontractors working in large tract developments, this is often their only available alternative. In other cases, the subcontractor is not aware that this limitation is contained in their policy.

As you might imagine, in almost every case a CGL policy containing a Contractual Limitation Endorsement will be less expensive than one without it. For this reason, when evaluating your options at renewal (acknowledging that options are usually few), it is very important to understand what you are getting or not getting for your money. A less expensive policy that contains this limitation and exposes you to potentially significant uncovered claims and, at the same time isn’t going to be accepted by those with whom you are contracting, probably isn’t worth it.

Every contractor involved in residential construction knows that liability insurance is a confusing, time consuming, expensive, necessary evil. While all of this is true, as the owner of the company it is imperative that you know the limitation of your policy and how it will or will not respond to those obligations you make each day in the contracts you sign.

Blake Johnson is Vice President of Minard-Ames Insurance Group and coordinates their insurance department. He has been with the firm for over 20 years and previously worked as a commercial casualty underwriter for a large national insurance carrier. His career focus is insurance issues affecting commercial and residential contractors. The past eight years, he has been assisting multifamily project developers with the unique insurance issues surrounding this type of construction. He also co-teaches an insurance class at ASU’s Del E. Webb School of Construction. He may be contacted at 800-359-2041.