General liability insurance policies typically contain several exclusions. One of the most common of these is the exclusion barring coverage for liability that the policyholder assumes through contracts with other parties. Depending on your business, it may be advisable to purchase a contractual liability endorsement as an add-on to your general liability policy.
Contractual Liability
Some businesses routinely agree to take on the liability of another party through indemnification or “hold harmless” agreements. These are common in the construction industry and in contracts between landlords and tenants. In an indemnification or hold-harmless agreement, one party promises to defend, indemnify and hold the other party harmless against bodily injury or property damage claims brought by a third party. For example, a construction contractor may agree to assume the liability and hold the building owner harmless if someone is injured during a construction project on the owner’s property.
The Contractual Liability Exclusion
With a contractual liability exclusion, an insurer seeks to limit its obligations to the policyholder for tort liability and to avoid responsibility for liability arising out of the insured’s contracts. The policy language generally states that coverage “does not apply to liability assumed by the insured under any contract or agreement except an incidental contract.”
How Courts Interpret the Contractual Liability Exclusion
Most courts have interpreted the wording “liability assumed by the insured under any contract” to apply only to indemnification and hold-harmless agreements, in which the insured agrees to assume the tort liability of another party. A small number of courts have interpreted the exclusion more broadly, holding that, based on the plain language in the policy, the exclusion can also apply to the policyholder’s breach of its own contracts under certain circumstances. A Texas court held, “We disagree, by and large, with the courts’ and treatises’ conclusions that the language of the contractual liability exclusion before us applies only to indemnification or hold-harmless agreements …. Insurance policy interpretation principles emphasize a policy’s plain language in determining its intended coverage.”1
Contractual Liability Coverage
A contractual liability endorsement can be purchased as an add-on to a general liability policy to fill the gap in coverage caused by the general liability exclusion. The endorsement typically states that the insurer “will pay on behalf of the insured all sums which the insured, by reason of contractual liability assumed by him under a contract…. shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence…”
This endorsement does not cover liability stemming from an insured’s failure to fulfill its contractual obligations to another party. Rather, it applies to situations where the insured has assumed the tort liability of another party through an indemnification or hold-harmless agreement. As one court stated, “Contractual liability coverage has a definite meaning. It is coverage of the insured’s contractual assumption of the liability of another party.”2
For a standard contractual liability endorsement, the insured will need to specify the contracts to be covered under the endorsement. A blanket contractual liability endorsement, which is typically more expensive, covers all contracts.
Footnotes
1 Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 130 n. 8 (Tex. 2010)
2 Musgrove v. Southland Corp., 898 F.2d 1041, 1044 (5th Cir. 1990)
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.