Parties to a contract often rely on their insurance coverage to protect them, and sometimes others, from liabilities they assume in the contract (aka “contractual liability”). Often, the parties aren’t concerned with knowing exactly how their insurance policy will provide this coverage; they just want to know that there will be coverage. Standard form Commercial General Liability (CGL) policies include contractual liability protection, which provides coverage for most liabilities assumed in most contracts. Parties to a contract can increase the likelihood of having contractual liability coverage by requiring the party assuming the liabilities to include the other party as an additional insured; in some contracts both parties are assuming liability and therefore both parties are (or should be) required to include the other party as an additional insured.
Here, we’ll explain the protections provided in the standard insurance forms created by the Insurance Services Office, Inc. (ISO). Not all carriers use these forms, but most non-standard forms will provide similar coverage.
Personal vs. Bodily Injury
To understand which liabilities an ISO standard form CGL covers, it’s important to understand the difference between personal injury and bodily injury. Under an ISO standard form CGL policy, personal injury is injury arising out of an offense of one or more intentional torts, such as libel, slander, defamation of character, false arrest, wrongful entry into, wrongful eviction from, malicious prosecution and other such actions. Bodily injury is bodily harm, sickness or disease, including resulting death.
Coverage for Personal and Bodily Injury
ISO standard form CGL provides coverage for bodily injury and property damage caused by an “occurrence” under Coverage A of the policy, as well as personal (and advertising) injury under Coverage B. The simplest way to distinguish between the two is understanding that personal injury typically results from an intentional act, whereas bodily injury results from an accident or unintentional act.
Contractual Liability Coverage
Coverage A and B initially exclude coverage for contractual liability, but both also include an exception for liability the insured would have in the absence of the contract. Coverage A includes an additional exception to the exclusion of contractual liability for bodily injury and property damage assumed in an insured contract, provided the bodily injury or property damage occurs subsequent to the execution of the contract. Coverage B doesn’t provide a similar exception for liability for personal (and advertising) injury assumed in a contract, even if the contract meets the definition of an insured contract.
In Simple Terms
If an insured’s liability for bodily injury or property damage is based solely on an agreement to assume the liability of another via a hold harmless or indemnity agreement in an insured contract, there should be coverage so long as the bodily injury or property damage occurs after the contract is executed. In comparison, if an insured’s liability for a personal (or advertising) injury is based solely on an agreement to assume the liability of another via a hold harmless or indemnity agreement, no coverage exists under the CGL. However, if an insured would have been liable for bodily injury, property damage, personal (or advertising) injury if the hold harmless or indemnity agreement didn’t exist, then the exclusions don’t apply.
Benefits of the Additional Insured Endorsement
Contractual liability and additional insured endorsements are often used as a belt-and-suspender approach to risk management; both complement one another, but only one is necessary. If an indemnity agreement is considered to be void and unenforceable for some reason, there will be no contractual liability coverage (the belt). When this happens, the party expecting to be indemnified can rely on its status as an additional insured (the suspenders). If the indemnity is enforceable, the broader of the available coverage should apply; usually the additional insured status because defense costs are provided in addition to the limits of coverage instead of diminishing the limits of coverage both parties are relying on to pay a settlement or judgment.
There’s a plethora of endorsements available to add another party as an additional insured to an insurance policy. Each one provides coverage to the additional insured differently, and most limit coverage to the extent required by a written contract (e.g. some will only provide coverage to the additional insured if the named insured was also responsible for the claim while some provide coverage for the additional insured’s sole negligence, etc.).
Impact on Indemnity Provisions
To get maximum coverage from an insurance policy, indemnity provisions should, at minimum, require indemnification for bodily injury and property damage, which should be included under the contractual liability coverage and an additional insured endorsement that matches the scope of the indemnity. As already said, there won’t be coverage for personal injury under contractual liability (unless the insured would have liability without the contract). If the parties to a contract agree to require the indemnifying party to assume the indemnified party’s liability for personal injury, then it’s imperative that the indemnifying party is also required to include the indemnified party as an additional insured.
When an indemnity agreement doesn’t include an indemnity obligation for bodily injury or property damage, the indemnifying party will only be responsible for bodily injury and property damage that it would be responsible for absent a contract; it will not be responsible for bodily injury and property damage caused by a party other than itself. Additionally, there will be no contractual liability for bodily injury or property damage caused by someone other than the named insured. Finally, depending on the language of the additional insured endorsement, an additional insured may not get coverage for bodily injury or property damage caused by someone other than the named insured.
Reading your contracts through an insurance lens takes a careful eye. When you partner with Higginbotham for your business insurance, we account for your risks and review your contracts so you’re covered for the liability you’re assuming. Learn more about our risk management services and contact our team.