Construction Insurance Bulletin

A general contractor builds a new home. The GC hires a subcontractor to install certain components. After the home’s completion, those components turn out to be defective. Not only that, but their defects begin to affect other parts of the building. The homeowner sues, and the GC, facing large legal defense costs and potential judgments, submits claims to its insurers. The insurers deny coverage, saying that this was no accident, as the insurance policies use the term. Was this incident indeed an accident for which the GC should have insurance coverage, or was it merely a business risk that comes with hiring subcontractors? In the opinion of a federal appellate court, it was an accident.

The case, Stanley Martin Companies, Inc. v. Ohio Casualty Group, involved the construction of 24 duplex townhouses in a suburb of Washington, D.C. Stanley Martin, a home builder, hired Shoffner Industries to supply the wood trusses for the new homes. In its contract, Shoffner gave Martin a warranty guaranteeing that the trusses were free of mold, and it agreed to reimburse Martin for any liability or other costs that might arise out of defects in the trusses or any negligence. After Martin completed the homes, some of the homeowners began to complain of mold infestations. Investigations of the problem showed that the mold growth started with defective trusses and surrounding materials. The affected homeowners sued Martin, who ended up spending a long time in litigation and paying more than $1.7 million to clean up the mold.

Martin sought coverage under its General Liability and Umbrella insurance policies. The court’s decision does not say what the General Liability insurance company did, but Ohio Casualty, who provided the Umbrella policy, denied the claim. Ohio Casualty’s policy covered an “occurrence,”� which it defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”� The company argued that the mold damage caused by the subcontractor’s defective work did not fall within this definition of “occurrence,”� and therefore the insurance did not apply. Martin sued Ohio Casualty for breach of contract, but the trial court sided with the insurance company. Martin appealed the decision, and the higher court ruled in its favor.

The court relied on a Maryland ruling which held that damage spreading from a subcontractor’s defective work to the general contractor’s non-defective work qualified as an “occurrence.”� Rejecting Ohio Casualty’s argument that the spread of mold was a further deterioration of already defective work, the court cited a legal definition of “accident”� as an event that takes place without one’s foresight or expectation. Martin, the court said, did not expect or intend for the subcontractor to supply moldy trusses, nor did it expect or intend for mold to spread throughout the buildings. The court held that the mold’s spread to non-defective building components was an “occurrence,”� and therefore Ohio Casualty was obligated to provide coverage for the replacement of those components. However, the court said that the need to replace the trusses was not unexpected nor unforeseen, and therefore the policy did not cover that.

This decision might not bind courts in all states, but it provides a useful guideline to them and to insurance companies and contractors. Because of this decision, insurance companies might demand that the general contractors they insure be very selective about the subcontractors they hire, with special attention to their reputations for quality of work. They might also insist that policies include deductibles for property damage claims, to encourage contractors to use loss control practices. Both the insurance companies and the contractors will need to make every effort to prevent these types of claims from occurring.

Imagine two accident scenarios. In the first, a construction worker falls off a ladder from 12 feet up and breaks his ankle. His employer has a policy requiring drug and alcohol testing for all workers who suffer work-related injuries that are likely to result in Workers Compensation claims. Can the employer legally do that? If it can, is it a good idea?

In the second, the construction worker is on the ground near the ladder. Someone asks him a question and he turns around to answer. At that exact moment, a worker 12 feet up on the ladder is stung by a bee and drops a component of the air conditioning unit he was installing. The component strikes the worker on the ground, fracturing his shoulder. His employer has the same policy about automatic testing after a workplace injury. Again, is this legal? Is it a good idea?

Employers have good reason to be concerned about the effects of drug and alcohol use in the workplace. A 2002-2003 workplace study showed that, in the prior 12 months, 7% of U.S. workers had consumed alcohol during the workday, 1.7% had worked while under the influence of alcohol, 9% had suffered from hangovers while at work, and 3% used illicit drugs on the job. To combat this, many employers have drug- and alcohol-free workplace policies that they enforce through testing workers for these substances. However, automatically testing all workers following work-related accidents might not be wise. In fact, it could end up hurting the employer.

First, automatic testing might be illegal in the employer’s state. A West Virginia court in 2002 found that Walmart violated the privacy rights of an employee when it required him to take drug and alcohol tests after he injured his back on the job. The jury relied on earlier court decisions holding that employers violated the state’s constitution by requiring testing without having a reasonable suspicion that the employee was using.

A 2001 decision from an Ohio court went even further. It struck down a state law that permitted employers to deny Workers Compensation benefits to employees who refused to submit to post-injury drug and alcohol tests. The court ruled that requiring testing of employees for whom the employers had no reason to suspect substance abuse amounted to a search of the employees. This search, the court said, violated the U.S. Constitution’s prohibition against unreasonable searches and a similar provision in the Ohio constitution.

Even where state law permits automatic testing, it might harm employee morale. Otherwise loyal and productive employees might feel offended if an employer demands that they submit to testing after they’ve been injured on the job. In the long run, this might hurt the employer’s ability to retain employees and recruit new ones.

It might also invite disability discrimination claims. When the employer does not routinely test all employees but tests only those who suffer workplace injuries, the injured employees might view this as discrimination against them due to their disabilities. They might seek redress under the Americans with Disabilities Act and pursue monetary damages from the employer.

As was the case with the West Virginia and Ohio decisions, automatic testing might invite invasion of privacy claims. At the least, this will subject the employer to long, expensive, and distracting litigation.

Employers should take sensible steps to ensure that their workplaces are safe. While post-injury drug and alcohol testing might make sense in many cases, it is not always appropriate or desirable. Employers should consult with human resources professionals to establish sensible testing policies, and seek the advice of our professional insurance agents to verify that you have the necessary insurance coverage in the event of a discrimination or privacy violation claim.

Acme Construction, a home building company, constructed 20 homes in 2003. It hired subcontractors to perform the concrete work, plumbing, wiring, and roofing. One year later, it received complaints from two of the homeowners about cracks in their foundations. Acme notified its Liability insurance company. When the homeowners eventually sued Acme, the insurance company provided legal defense and set up reserves to pay for any resulting settlements.

Fast forward to 2005 when Acme built 35 homes to meet the demands of an active housing market. Other than the subcontractor who did the concrete work in 2003, Acme hired the same group of subs to work on these homes. When snow started melting after the winter of 2007, complaints started to come in about leaking roofs. Eventually, seven homeowners determined that they had to replace their roofs completely, and sued Acme for the faulty work. Acme again notified its insurance company. This time, however, the company denied the claims, saying that the insurance policy did not cover them. Acme had to pay for its own legal defense and liabilities.

What changed between 2005 and 2007? The insurance company added to the policy an endorsement that created a significant coverage gap: ISO form number CG 22 94 10 01, Exclusion-Damage to Work Performed by Subcontractors on Your Behalf.

This endorsement modifies an important exclusion contained in the ISO Commercial General Liability coverage form. Without this endorsement, the exclusion states that the insurance does not apply to damage to the insured’s work if the damage arises out of it or any part of it and if the damage occurs after the insured has finished the work. However, the provision gives coverage back if the damage arose out of work performed by a subcontractor working on the insured’s behalf. In the 2005 incident, Acme had hired a subcontractor to build the foundations for the new homes. Because the subcontractor had done the faulty work, Acme’s CGL policy covered the resulting defense costs and liability.

Endorsement CG 22 94 strips that coverage give-back from the policy. With it attached, the policy does not cover liability for damage to the insured’s work and arising out of it, even if another contractor actually performed the work. Accordingly, Acme’s policy did not cover its liability for the defective roofs. Without the attachment of this endorsement, Acme would have had coverage.

An insurance company might add this endorsement to a policy in the belief that faulty construction is a business risk, not an insurable one. Accidents such as slips and falls, unintentional fires, and injuries suffered while using a product are all examples of insurable risks. Performing work improperly, mismanaging cash flow, and making poor strategic business decisions are examples of business risks. Insurance companies feel they cannot insure business risks because to do so would remove an incentive to reduce those risks. If a carpenter knows he can collect insurance if he does a sloppy job building a house, he has less of an incentive to build it well. When a company attaches CG 22 94 to a policy, it is transferring the risk of a subcontractor’s poor performance back to the insured.

Almost all contractors subcontract at least some of their work, so this is an issue to take seriously. Review their Liability insurance with our agents to determine whether you have this endorsement. Since it can present a very significant coverage gap, discuss alternatives, such as negotiating with the company to remove it or seeking another company that is willing to leave it off. Even if it means paying an additional premium, removing the endorsement could save a lot of expense in the long run.

In 2008, U.S. employers reported 3.7 million nonfatal occupational injuries and illnesses, according to the U.S. Bureau of Labor Statistics. Although this number was down from the prior year, it still shows that workplace safety must be a priority for employers. When workers get hurt or sick on the job, productivity suffers, the employer becomes less attractive to the other employees, and managers’ attention shifts away from growing the business. Preventable accidents also hurt the bottom line in another way — they eventually raise Workers Compensation costs by increasing the employer’s experience modification factor.

The experience mod is a number calculated by the Workers Compensation rating bureau in the employer’s state. It’s a reflection of how the employer’s loss history for the prior three years (not including the current year) compares with that of an average employer in the same industry. It takes into account the size of the employer’s payroll for those years, and the number and severity of its losses. The formula penalizes an employer more for frequent losses than for expensive ones. For example, an employer with 10 losses of $3,000 each will have a higher experience mod than will a similar employer with one loss of $30,000. The insurance company must, by law, multiply the employer’s Workers Compensation insurance premium by the experience mod factor. A factor of less than 1.0 reduces the premium, while a factor greater than 1.0 increases it. Therefore, it makes financial sense for employers to take steps to prevent frequent on-the-job accidents.

There are several things employers can do to improve their accident records and save on Workers Compensation premiums.

• Make workplace safety a top priority. The things that are important to managers become important to workers. Provide continuing training to workers on job site safety and enforce safety requirements.
• Obtain and review publications about the industry from the U.S. Occupational Safety and Health Administration. These publications provide practical recommendations for preventing injuries. For example, the “Construction – Hand and Power Tools” category has a document titled, Safeguarding Equipment and Protecting Employees from Amputations.
• Keep the work environment clean. This reduces the risk of employees contracting airborne illnesses; eliminating clutter makes trip-and-fall accidents less likely.
• Maintain machinery and equipment in good working order. Check it regularly for safe operation.
• Institute programs to keep the workplace drug and alcohol free. Within legal parameters, test employees for drug and alcohol use.
• Review loss information from insurance companies. Look for trends in the types of losses that occur. They could indicate dangerous work procedures, incentives that cause employees to rush, defective tools, or another factor in need of correction.
• Take advantage of the expertise in the insurance company’s loss control department, particularly if the company specializes in insuring businesses in your particular industry. They can recommend measures that have proven to work for similar businesses.
• Monitor employee morale. Unhappy workers can become careless or slipshod in their work. Take steps to improve morale and to deal with employees who might be causing problems.
• Review the experience mod worksheet with one of our insurance agents. Ensure that the insurance companies have reported all losses accurately to the rating bureau. Ask to have errors corrected, and follow up until it happens.
• Require employees to report all injuries, no matter how minor they appear. Make sure that injured employees receive prompt medical attention.

No one benefits when employees get hurt on the job. With focus and effort, employers can make workplace injuries less frequent and less severe. That will make your business a better place to work, and add hard-earned dollars to the bottom line.

Scenario #1: A structural steel erection firm wins a contract for the construction of a five-story office building in an urban location. The contract requires the firm to assume the general contractor’s legal liability for accidents occurring during the project and arising out of the steel work. One week into the project, a crane lifting a load of steel bars topples over into a street, damaging cars, nearby buildings, and injuring drivers and pedestrians. Several of the victims file suit against the property’s owner, the general contractor, and the steel firm. As per their agreement, the general contractor looks to the steel firm to defend it in court and pay any resulting judgments. The steel firm forwards the claim to its Liability insurance company, which proceeds to defend both the steel firm and general contractor. The company settles with the victims and pays on behalf of both contractors, up to the policy’s limits.

Scenario #2 is identical to #1, but this time the insurance policy contains a wrinkle. The policy includes a special endorsement, ISO form number CG 21 39 10 93, Contractual Liability Limitation. Accordingly, the insurance company defends the steel firm and pays an amount to settle its claims. However, it refuses to defend the general contractor or pay the amount of the loss the steel firm assumed under the contract. When the steel firm is unable to pay these sums out of pocket, the general contractor sues for breach of contract, setting off a long round of litigation.

What is the Contractual Liability Limitation Endorsement? What does it do, and why would an insurance company use it?

The Commercial General Liability coverage form states that it does not cover injuries or damages for which the insured must pay by reason of having assumed liability under a contract. However, it turns around and gives some coverage back: It will pay for liability the insured assumed under an “insured contract,” a term that the policy further defines. The term includes a real estate lease, a railroad sidetrack agreement, an easement or license agreement not pertaining to railroad work, a requirement to indemnify a municipal government, an elevator maintenance agreement, and other agreements in which the insured assumes the tort liability of another party. The Contractual Liability Limitation Endorsement changes that definition: It removes completely the last part (other agreements in which the insured assumes another party’s tort liability) from the definition. When a liability policy includes this endorsement, these types of agreements are not insured contracts, and the policy does not cover liability assumed under them.

In both scenarios, the steel firm (the insured) assumed the tort liability of the general contractor. In scenario #1, the steel firm had a liability policy without the Contractual Liability Limitation, and the insurance company paid for the amount of the loss the firm assumed. In scenario #2, the endorsement applies; the company does not pay anything for the general contractor’s defense or liability. For many construction firms, this can be a catastrophic gap in coverage.

An insurance company may add the endorsement to a contractor’s policy if it wants to approve the insured’s contracts selectively on a case-by-case basis, rather than insuring them all on a blanket basis. This gives the company some control over its exposure, but it can be slow and cumbersome for the insured.

All construction firms should review their Liability insurance policies with their agents to determine whether the company has added this endorsement. If it has, a discussion on what to do about it is essential. It will be too late to do solve the problem after a loss occurs.

In its efforts to maintain electrical safety in the workplace, OSHA develops its standards in accordance with those published by the National Fire Protection Association (NFPA). To ensure that employers are following both sets of guidelines, OSHA trains its inspectors to ask specific questions when investigating an electrical safety incident. Some of those questions include:

• Do you have a written description or drawing of the circuit or equipment at the job site? If an employer doesn’t, the assumption is that the employer has performed an electrical hazards assessment of the facility.
• Is there a detailed account of all of the tasks involved in the planned work? This is the only way the employee will know what safety procedures to follow.
• Were the workers qualified to perform the task? By definition, qualified workers are those specially trained to work on live electrical equipment. They must know how to protect themselves against all electrical hazards, including shock, arc flash, burns, explosions, and they must be trained in the electrical safe work practices that have been established by their employer.
• Is there any justification for not de-energizing the equipment or not waiting to do the work at the time of the next scheduled outage? OSHA standard 1910.333(a)(1) requires that live parts must be de-energized before an employee works on or near them. The only exception to this requirement is if the employer can prove that de-energizing will create additional or increased hazards, or it isn’t practical because of the design of the equipment, or operational limitations.

If a worker must perform a task on equipment that hasn’t been de-energized, 1910.333(a)(2) says that safe work practices must be employed to protect the worker from coming in to contact with energized circuit parts directly with any part of their body or indirectly through some other conductive object. These safe practices must be described in detail and pre-established by the employer. There must also be a job briefing before workers perform the task so that they are aware of the hazards they will encounter and what procedures to use. In addition, NFPA 70E Article 110.8(B)(1) requires that an Electrical Hazard Analysis be performed on live equipment operating at 50 volts and higher before any work is begun.

The electrical hazard assessment includes both a shock hazard analysis and an arc flash hazard analysis. Employers must calculate the potential fault current at each piece of equipment, determine how the over-current protective devices are coordinated for each circuit, and use this information to create or update single-line electrical drawings.

OSHA inspectors will examine whether employees wore the appropriate personal protective equipment (PPE) and used proper insulated tools. They will also ask if insulated blankets or sheeting were used to cover all of the live parts.

The physical layout and inherent potential risks found at any commercial business property are unique. To ensure that your business premise is free from safety hazards, it is best to contact trained occupational safety professionals. However, management can perform a thorough check by carefully reviewing all potential hazards to protect employees and visitors alike. Creating a thorough risk assessment consists of several steps:

• Determining who could be injured
• How they might be injured
• Establishing whether current safeguards are adequate or whether more should be done
• Fully understanding and complying with all appropriate federal and state safety laws and regulations

Premises safety essentially breaks down into four main components:

1. Safety – Includes overall maintenance of the physical premises, both inside and outside and entails machinery, equipment, electrical systems, elevators, entrances and exits, use of adequate and approved personal protection equipment, fire exits and equipment, windows, warning signs, quality of surfaces, and access.
2. Health Issues – Includes issues of adequate lighting, noise, proper ventilation and maintenance of filtering systems, overall cleanliness, temperature, exposure to dust, chemical, fumes, or other particulates.
3. General Welfare – Includes accessibility to quality drinking water, eye wash stations, ergonomics, repetitive movement, and overall cleanliness of the workplace.
4. Occupation Types – As each job description and responsibilities might vary, a thorough understanding of what each job description entails is necessary to appreciate all potential risks faced by individual employees.

Assessing Risk Potential

All potential hazards should be graded according to the potential severity of an accident or injury ranging from:

• Negligible (Unlikely to cause accident or injury)
• Marginal or remote (Might cause minor or minimal injury)
• Critical or reasonably probable (Might result in serious injury or accident)
• Disastrous or very probable (Likely poses imminent accident or injury)

Premises Safety Checklist Essentials

Performing a walk through and talking to a cross section of employees should be done monthly. Your general inspection should include but not be restricted to:

• Working Environment – Adequate ventilation and personal protective devices for particulates such as fumes, dust, sprays, or excessive noise.
• Electrical – Check all outlets, bulbs, cables, connectors and breakers, and emergency lighting.
• Building – Check for frayed carpets, blocked exits, oily or wet floors, etc.
• Building Exterior – Examine security fences, bin containers, condition of concrete and pavement, walkways and hand rails, warning signs, and storage areas.
• Hazardous Materials – Examine how flammable materials are stored and how caustic, acidic, and cleansing materials are handled, properly labeled and used per regulatory requirements.
• Storage Facilities – Ensure overhead materials are stored and balanced properly and examine condition of all shelving.
• Fire Safety – All fire exits should be marked clearly, with illuminated safety exits. Examine fire extinguishing equipment and ensure that fire procedures are well posted.
• Production Equipment – Confirm all pulleys, chains, gear covers, engines, motors, compressors, protective guards, belts, screens and pulleys, warning systems, emergency switches, mirrors, and warning sirens are in good working condition.
• Handling of Materials – Examine all conveyor belts, hoists, ropes and chains, and lifts. Ensure that weighted materials are being handled according to specs. All personnel should be using appropriate personal protective devices.
• Sanitation – Ensure that sanitary conditions are maintained in washrooms, water fountains, lunch facilities, and changing areas.
• Personal Protection Devices – Check that PPDs are in good condition, clean, and are suitable for the various jobs required.

No doubt there are many other aspects of your business that need to be included in your checklist. Good communication with your personnel, management, and regular inspections can help to correct hazards and reduce your risk.

A Commercial General Liability policy (CGL) lists six different limits on the policy’s declarations page. Although the limits might be listed separately, it’s important to understand that they are all interrelated. That means that payment of damages for one limit will affect another limit. To illustrate how these limits interact, it is necessary to examine each one in detail:

The General Aggregate Limit – The maximum amount the insurer will pay during the policy period for all damages including bodily injury, property damage, personal and advertising injury except for any amount paid as damages because of bodily injury or property damage included within the products-completed operations hazard. The definition of the products-completed operations hazard is outlined in the policy and a separate aggregate limit applies to this type of claim. Also included within the general aggregate are damages paid for medical payments.

Products-Completed Operations Aggregate Limit – The maximum amount the insurer will pay for damages because of bodily injury or property damage included within the products-completed operations hazard. The specified hazards are those described within the definition of the products-completed operations hazard and are limited to bodily injury or property damage that:

• Occurs away from the insured’s premises.
• Are caused by the insured’s products that are no longer in the insured’s possession or an insured’s work that has been completed.

Personal and Advertising Injury Limit – The maximum amount the insurer will pay if legally obligated to pay damages due to personal and advertising injury offenses. The personal and advertising injury limit applies separately to each person or organization that sustains damages because of a covered offense. However, regardless of the number of persons or organizations claiming damages, or the number of offenses claimed during the policy period, the insurer is only obligated to pay up to the general aggregate limit.

Each Occurrence Limit – The maximum the insurer will pay for the sum of all damages due to bodily injury, property damage, and medical payments. Keep in mind that there is an aggregate limit for bodily injury and property damage claims that arise from the products-completed operations hazard and a separate limit for all other bodily injury and property damages. However, the each occurrence limit does apply to all sums paid for medical payments.

Damage to Premises Rented to You Limit – This coverage is actually an exception to certain exclusions found in the bodily injury and property damage coverage. The first exception provides coverage for property damage to a premises and its contents, rented to the insured for seven or fewer consecutive days if an insured is legally obligated to pay for such damage due to any cause except fire.

The second exception provides coverage for damage to the premises only if an insured is legally obligated to pay for property damage due to fire. However, if an insured is held liable solely due to an agreement to be responsible for the property or for damage to the property, there is no coverage. Liability has to be imposed on the insured as the result of a lawsuit in order for coverage to apply.

The Damage to Premises Rented to You limit applies to any one premises. Any property damage paid under this limit will reduce the each occurrence limit for that same occurrence and will also reduce the general aggregate limit.

Medical Expense Limit – The medical expenses coverage is a separate insuring agreement that obligates the insurer to pay reasonable medical expenses for bodily injury caused by an accident, without regard to fault. Medical payments are subject to the medical expense limit. The medical expense limit applies separately to each person. However, medical payments will reduce the each occurrence limit for that same occurrence and will also reduce the general aggregate limit.

Lawsuits are a common occurrence in our litigious society. An effective way to limit your liability is to specify your responsibility in a contractual relationship. Risk can be transferred contractually by including “hold harmless” clauses in agreements.

In a hold harmless agreement, one party agrees to protect or “indemnify” another from claims brought by a third party for financial loss or damage. A good example is a general contractor who hires a subcontractor to complete a job for a third party. To protect himself, the general contractor may require the subcontractor to sign a hold harmless agreement. The agreement would indemnify the general contractor if any problems arose from the subcontractor’s work.

Read before You Sign on the Dotted Line

In a hold harmless agreement, the indemnitor (the party that has assumed the liability) is responsible for all financial loss. Some hold harmless clauses are very broad. Surprisingly, they may include liability even if the indemnified company was solely responsible for the damage. On the other hand, a Contractual Liability insurance policy can protect the indemnitor, but might not cover all aspects of liability.

In our example above, the hold harmless agreement gives the general contractor the right to collect for damages paid to the third party to the extent enforceable under the law. However, the indemnified party should exercise caution. The ability to uphold indemnification agreements differs by state, because state laws vary as to what risks may be transferred. Also, some courts have ruled indemnification clauses unenforceable if they were not clear and precise.

Protect Your Assets

With a General Liability policy, Contractual Liability insurance is provided automatically. The coverage is created to pay to a third party damages assumed as part of an “insured contract.” However, the definition of an insured contract is limited, and coverage is written as an exception to an exclusion. That means the policy excludes coverage except for specific circumstances. Additional policies, such as Professional Liability insurance, might be required to cover exposures that are not covered under General Liability policies.

Usually, General Liability insurance covers only bodily injury or property damage. But once again, these are subject to exclusions, conditions, and limitations, and the injury or damage must have occurred after entering into the contract.

Furthermore, the liability must be one that would be imposed without the contract or one that is assumed in a hold harmless or indemnity agreement that falls within the definition of insured contract under the policy. General Liability policies do not cover breach of contract.

Before signing any contract, it is wise to talk to an attorney, so that you do not assume liability that is not covered under your General Liability insurance policy. Take time to read your insurance policy endorsements carefully, and don’t be afraid to ask our insurance agents to explain anything you do not understand. We will help you to determine the types of coverages your business needs to protect your assets.

Lawsuits are a common occurrence in our litigious society. An effective way to limit your liability is to specify your responsibility in a contractual relationship. Risk can be transferred contractually by including “hold harmless” clauses in agreements.

In a hold harmless agreement, one party agrees to protect or “indemnify” another from claims brought by a third party for financial loss or damage. A good example is a general contractor who hires a subcontractor to complete a job for a third party. To protect himself, the general contractor may require the subcontractor to sign a hold harmless agreement. The agreement would indemnify the general contractor if any problems arose from the subcontractor’s work.

Read before You Sign on the Dotted Line

In a hold harmless agreement, the indemnitor (the party that has assumed the liability) is responsible for all financial loss. Some hold harmless clauses are very broad. Surprisingly, they may include liability even if the indemnified company was solely responsible for the damage. On the other hand, a Contractual Liability insurance policy can protect the indemnitor, but might not cover all aspects of liability.

In our example above, the hold harmless agreement gives the general contractor the right to collect for damages paid to the third party to the extent enforceable under the law. However, the indemnified party should exercise caution. The ability to uphold indemnification agreements differs by state, because state laws vary as to what risks may be transferred. Also, some courts have ruled indemnification clauses unenforceable if they were not clear and precise.

Protect Your Assets

With a General Liability policy, Contractual Liability insurance is provided automatically. The coverage is created to pay to a third party damages assumed as part of an “insured contract.” However, the definition of an insured contract is limited, and coverage is written as an exception to an exclusion. That means the policy excludes coverage except for specific circumstances. Additional policies, such as Professional Liability insurance, might be required to cover exposures that are not covered under General Liability policies.

Usually, General Liability insurance covers only bodily injury or property damage. But once again, these are subject to exclusions, conditions, and limitations, and the injury or damage must have occurred after entering into the contract.

Furthermore, the liability must be one that would be imposed without the contract or one that is assumed in a hold harmless or indemnity agreement that falls within the definition of insured contract under the policy. General Liability policies do not cover breach of contract.

Before signing any contract, it is wise to talk to an attorney, so that you do not assume liability that is not covered under your General Liability insurance policy. Take time to read your insurance policy endorsements carefully, and don’t be afraid to ask our insurance agents to explain anything you do not understand. We will help you to determine the types of coverages your business needs to protect your assets.