Contractual liability coverage and insured contracts

When you sign a contract that says you will indemnify or hold harmless another party, your commercial general liability policy responds only if the liability you assumed is an "insured contract" under the policy. The ISO CGL form excludes liability you take on by contract, then gives it back for a defined list of agreements, including the broad category of contracts in which you assume another party's tort liability to a third person. Endorsements and state anti-indemnity statutes can shrink that coverage, so the fine print and the state matter as much as the clause.

The exclusion and the exception

The ISO commercial general liability form (CG 00 01) contains a contractual liability exclusion. It removes coverage for bodily injury or property damage for which the insured is obligated to pay damages because of the assumption of liability in a contract or agreement. Two exceptions bring coverage back:

1. Liability the insured would have even without the contract. A negligent act is covered whether or not you also promised to pay for it.
2. Liability assumed in an "insured contract," as long as the injury or damage occurs after the contract is signed.

Everything depends on how the form defines insured contract. The ISO definition lists:

• a lease of premises (with a carve-out for fire damage to premises rented to you, which is covered elsewhere)
• a sidetrack agreement with a railroad
• an easement or license agreement, except for construction or demolition work near a railroad
• an obligation required by ordinance to indemnify a municipality, except in connection with work for the municipality
• an elevator maintenance agreement
• that part of any other contract 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

The last item, commonly called paragraph f, is the one that matters for most businesses. "Tort liability" means liability the law would impose in the absence of the contract. The form excludes from paragraph f certain agreements involving railroads and agreements that indemnify architects and engineers for their design or professional errors. See CGL exclusions: what a general liability policy does not cover and indemnification and hold harmless clauses and your insurance for context.

What "insured contract" does and does not cover

It covers promises to pay for someone else's liability to a third party. If you are a subcontractor and agree to indemnify the general contractor against claims by injured third parties, the CGL can cover that indemnity. A tenant's agreement to indemnify the landlord against customers' injury claims at the premises works the same way.

It does not cover the following:

• Breach of contract. If you fail to perform or breach a warranty, the resulting damages are generally not bodily injury or property damage caused by an occurrence, and are not assumed tort liability.
• A promise to buy insurance. If you agree to name the other party as additional insured and never do, the other party's loss is a breach of contract claim. It is uninsured. See additional insured endorsements explained.
• Fines, penalties and liquidated damages written into a contract.
• Your own professional services. Design-professional indemnity usually needs separate professional liability coverage.

Defense costs are the other half. The ISO form's supplementary payments provision lets the insurer defend an indemnitee named in the same suit if conditions are met, including that the insured assumed the indemnitee's defense in the same insured contract and no conflict of interest appears. Where the insurer does not take over the indemnitee's defense that way, the form treats the indemnitee's reasonable attorneys' fees and litigation expenses, if you assumed them in the same insured contract, as damages, and damages erode the limit. Details differ by policy, so read the supplementary payments section. See the insurer's duty to defend: what triggers it and when it ends and defense costs inside vs outside policy limits: why it matters.

Endorsements that narrow the coverage

Carriers can reduce the broad form of contractual liability coverage by endorsement. Two ISO endorsements matter.

• CG 24 26 (Amendment of Insured Contract Definition). The endorsement amends paragraph f so that it applies only where the injury or damage is caused, in whole or in part, by you or by those acting on your behalf, according to a trade summary of the 04 13 edition. That turns broad-form coverage into intermediate-form coverage: you are not covered for an indemnitee's sole negligence.
• CG 21 39 (Contractual Liability Limitation). The endorsement removes paragraph f from the definition, leaving only leases, sidetrack agreements, easements, ordinance indemnities and elevator agreements. After it is attached, most business indemnity agreements are not covered by the CGL.

Check for these on the forms list at every renewal. A subcontractor with CG 21 39 attached has signed indemnity agreements the policy will not honor, and the certificate of insurance will usually not tell the contractor.

State anti-indemnity statutes

Construction contracts often ask the subcontractor to indemnify the contractor or owner even for the indemnitee's own negligence. Many states limit this by statute. Some statutes void only indemnity for the indemnitee's sole negligence; others, including the two below, also void indemnity for the indemnitee's partial negligence. Exceptions, covered projects and insurance carve-outs differ, and the same contract may be enforceable in one state and partly void in another.

• Texas. Chapter 151 of the Insurance Code, effective January 1, 2012, voids a construction contract provision to the extent it requires an indemnitor to indemnify or defend a party against a claim caused by the indemnitee's own negligence or fault, subject to an exception for bodily injury or death claims by the indemnitor's own employees. The chapter's definition of construction project leaves out single-family houses, townhouses and duplexes. Section 151.104 also voids additional insured requirements to the extent they provide coverage the statute prohibits for indemnity. See Texas.
• New York. General Obligations Law section 5-322.1 voids construction-related indemnity for injury or damage caused by the promisee's own negligence, in whole or in part, without affecting the validity of insurance contracts issued by admitted insurers. See New York.

Other states take other approaches. workers' comp and benefits requirements by state and the state guides are the place to start, and a construction attorney should review a significant agreement. These statutes also change what the insurance can do: if the indemnity is void for the indemnitee's own negligence, the CGL has less to cover.

Reading a clause line by line

Subcontractor shall defend, indemnify and hold harmless Contractor and Owner from all claims for bodily injury or property damage arising out of the Work, except to the extent caused by the sole negligence of the indemnitee.

• "Defend" adds a duty to pay defense costs from the first claim. Check whether the policy treats it as a supplementary payment or as damages.
• "Indemnify and hold harmless" is the promise to pay judgments and settlements.
• "Arising out of the Work" is broad. If the policy is endorsed with CG 24 26, coverage may require that you or your people caused the injury at least in part.
• "Except to the extent caused by the sole negligence of the indemnitee" makes this an intermediate-form clause: it shifts the indemnitee's partial negligence to you but not its sole negligence. A limited-form clause would say "to the extent caused by the negligence of Subcontractor." In states that void indemnity for the indemnitee's partial negligence, the intermediate version is only partly enforceable.

Run any contract through the contract insurance requirements checker and compare the indemnity with your actual CGL endorsements, not with your certificate.

A worked example (hypothetical)

Say a 10-person HVAC subcontractor in Texas signs a subcontract agreeing to indemnify a general contractor for all claims arising out of its work, including claims caused by the general contractor's own negligence. An employee of the subcontractor falls from a rooftop unit and sues the general contractor.

• Texas Insurance Code section 151.102 voids the indemnity to the extent it covers the general contractor's own negligence, but section 151.103 excepts claims for bodily injury or death of the indemnitor's own employees, so the clause may still be enforceable for this claim.
• The subcontractor's CGL excludes injury to its own employees, but the ISO employer's liability exclusion has an exception for liability assumed in an insured contract. That exception is how the policy can respond.
• If the CGL carries CG 24 26, coverage depends on whether the injury was caused at least in part by the subcontractor or those acting for it. If CG 21 39 is attached, the policy may not respond at all.
• The employee's direct suit against his own employer is generally barred by workers' compensation exclusive remedy, so the claim reaches the subcontractor through the contract. State rules on employer indemnity for employee injuries vary.

The outcome in a real case depends on the exact forms, facts and Texas law, so this is a pattern and not a prediction.

Practical steps

1. Read the indemnity and insurance sections together before you sign.
2. Ask your broker whether the CGL has CG 24 26, CG 21 39 or a carrier-specific equivalent, and what each does to your indemnity.
3. Negotiate the clause to the extent caused by your own negligence where you can.
4. Confirm the statute that governs the contract's state.
5. Keep indemnity, additional insured and waiver-of-subrogation requirements aligned. See contractual risk transfer: shifting liability by contract and insurance and waiver of subrogation: what it is and when contracts require it.
6. Require the same from your own subcontractors. See managing subcontractor insurance and certificates.

Key takeaways

• The CGL excludes liability assumed by contract unless it is liability you would have anyway or liability assumed in an insured contract.
• Paragraph f of the insured contract definition, the promise to pay another party's tort liability to third persons, is the coverage most contracts depend on.
• Endorsements such as CG 24 26 and CG 21 39 can narrow or remove that coverage, and the certificate will not show them.
• Failing to buy the insurance you promised, or breaching the contract, is not covered liability.
• State anti-indemnity statutes can void parts of an indemnity clause, so the governing state's law matters.