In many construction contracts, it is common for standard insurance clauses to require that the downstream party (either the general contractor or a subcontractor) carry commercial general liability (CGL) insurance, and that such insurance include, among other things, coverage for "contractual liability." This requirement often results in confusion. It's time to clear the air on this.

An Exclusion Narrowed by Exceptions

Standard CGL policies, such as the CG 00 01 form, explicitly exclude liability that a business expressly agreed to assume under its contract. This is known as the "contractual liability" exclusion. That exclusion, however, is narrowed in scope by a couple of exceptions. One of the exceptions is when liability would be found in the absence of a contract (e.g., a duty to perform work safely, which is a requirement even without a contract). The other is when the liability is assumed under an "insured contract." Under this latter exception, things become a bit more complex.

Liability Assumed Under an "Insured Contract"

The definitions section of the standard CGL policy defines "insured contract" in several ways. For purposes of this article, it is part "f" of the definition that matters most. This part says that "Insured contract means … that part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement."

With that definition in mind, we turn back to the second exception to the contractual-liability exclusion, which provides that "This exclusion does not apply to liability for damages … assumed in a contract or agreement that is an 'insured contract' …"

Accordingly, if the contractor or subcontractor carries a standard CGL policy, then "contractual liability" is included, provided that the contract between the parties satisfies the definition of "insured contract."

Some policies, however, are amended by a Contractual Liability Limitation Endorsement, which is typically noted with ISO identifier CG 21 39. This endorsement alters the definition of "insured contract" by deleting part "f" from it. Thus, for all practical purposes, this endorsement results in rendering the all-important second exception to the contractual liability exclusion inapplicable, which could mean that a business is exposed to a risk that it expected to be covered by the downstream party.

Thus, to better protect your business from an unexpected and uninsured exposure, the upstream party (either the owner or the general contractor) should make it absolutely clear in the "insurance requirements" section of contracts that any form of a Contractual Liability Limitation Endorsement will not be accepted.