Insuring Contractual Obligations

By Blake Johnson

This article will attempt to address where you find insurance coverage for the obligations you accept once you sign on the dotted line.

 

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Whether you are a subcontractor or general contractor, a frequent occurrence is the review and signing of construction contracts. From an insurance perspective, one section in these contracts is extremely important to review (aside from the section that outlines your insurance requirements). The section I am referring to is the Indemnification/Hold Harmless provision.

This article will attempt to address where you find insurance coverage for the obligations you accept once you sign on the dotted line.

One of the most mysterious insurance policies you will ever purchase is the Commercial General Liability Policy (CGL). At the same time, it is one of the most important in terms of providing protection for you and your business. 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" coverage, as being found in a CGL policy. The reality is that Contractual Liability is actually an exclusion under this 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. What is an "Insured Contract"? The CGL policy defines it. While there are a number of agreements that fit the definition, one of the more important ones 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 and that would be:

1. A contract that indemnifies a railroad arising out of construction within 50 ft. of any railroad property

2. 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

3. 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, you do have coverage under a CGL policy for the obligations you take on in contract to indemnify and hold harmless either the general contractor or owner depending on with whom you are contracting. There are, however, some VERY important issues to consider: