Contractual liability coverage is automatically included in the standard insurance services office (ISO) general liability policy by an exception to the contractual liability exclusion. The exception affords coverage for liability assumed under any contract that qualifies as an insured contract. Insured contract is a defined term that's explained in the policy definitions. Its meaning is the crux of contractual liability insurance because it determines the types of contracts that are covered by the policy.
Purpose of the Definition
The term insured contract is defined in the policy to clarify the scope of contractual liability coverage. A contract is covered only if it fits one of the categories outlined in the definition. The definition also avoids the need to list individual contracts in the declarations. Contracts are covered automatically if they fall within the meaning of the defined term.
Insured Contract Categories
The definition of insured contract includes six categories of contracts commonly used in business. The first five consist of specific kinds of contracts, such as building leases, sidetrack agreements, and easements. The sixth is a broad category that includes any contract in which the insured assumes the tort liability of another party.
Lease of Premises
A lease of premises (the first category) is one of the most common types of business contracts. While a building lease is covered, any provision in the document that requires you to compensate the landlord for fire damage to the building is not an insured contract.
For example, suppose your business leases a building from Prime Properties. The lease requires your company to indemnify Prime Properties for any damage that occurs to the building during the term of the lease. One night, an arsonist starts a fire that damages the building. Because the damage occurred during the term of the lease, you are obligated under the contract to reimburse Prime for the cost of repairs. If the landlord demands payment, your liability policy won't cover the loss. An agreement to indemnify the premises owner for damage by fire is not an insured contract.
In the previous example, suppose the fire was caused by an employee's careless disposal of a cigarette. In this case, the building damage would be insured by fire damage to premises rented to your coverage. This coverage is included under Bodily Injury and Property Damage Liability and is separate from contractual liability. It covers damage for which you are legally liable under common law (not because of a contract).
A sidetrack agreement is a contract in which a railroad allows a business to use a sidetrack, a short section of railroad that connects to the main track. In exchange, the business promises to indemnify the railroad for any claims that arise from the business' negligent use of the sidetrack.
Easement or License Agreement
An easement allows someone to use property owned by someone else. For instance, suppose that Bill's property lacks a direct route to a nearby road. Bill's neighbor, Jeff, allows Bill to access the road via Jeff's driveway.
A license gives someone permission to use the property for a specific purpose. For instance, a city issues a license allowing an art gallery to hold a fundraising event at a city-owned arts center.
A key difference between a license and an easement is that the latter gives the easement holder an interest in the property. That interest can be transferred when the property is sold.
Obligations Required by Ordinance to Indemnify a Municipality
When a business engages in a hazardous activity inside a city, and the activity injures someone, the injured party may sue both the business and the city. To protect themselves, cities often pass ordinances requiring businesses to indemnify them against third-party lawsuits that arise from the businesses' negligence.
For example, a city passes an ordinance requiring business owners to maintain sidewalks adjacent to their premises. The ordinance states that if a third party is injured because a business has failed to maintain a sidewalk and the injured party files a claim against the city, the business must indemnify the city for the cost of the claim.
Elevator Maintenance Agreement
Building owners often hire elevator servicing contractors to maintain the elevators in their buildings. In a typical elevator maintenance agreement, the contractor agrees to indemnify the building owner for the cost of third-party claims that result from the contractor's failure to properly maintain the building owner's elevator.
Blanket Assumption of Tort Liability
The final category of insured contracts consists of assumptions of tort liability. It includes any contract in which you (the named insured) agree to indemnify another party for the cost of a claim or suit alleging bodily injury or property damage caused by your negligence.
For example, suppose that Larry's Landscaping rents a lawnmower from Edwards Equipment. Edwards requires Larry to sign a contract containing an indemnity agreement. In the agreement, Larry promises to indemnify Edwards if Larry's Landscaping accidentally causes bodily injury or property damage to a third party while using the lawnmower, and the injured party seeks restitution from Edwards Equipment.
The automatic coverage afforded for assumptions of tort liability is often called blanket contractual liability insurance.
The coverage afforded for assumptions of tort liability does not include any of the following:
- An agreement to indemnify a railroad: This agreement is for injury or damage arising out of construction or demolition operations within 50 feet of any railroad property. For example, a paving contractor has been hired by a city to repave a road that crosses a railroad track. The contractor signs an agreement promising to indemnify the railroad for the cost of any third-party claims for injury or damage that arises from the contractor's work. The indemnity agreement is not an insured contract.
- An agreement to indemnify an architect, engineer, or surveyor: This agreement is for injury arising out of their professional acts. Professional liability is not covered under a general liability policy.
- Agreements to indemnify someone else: This agreement is for injury arising out of your professional acts as an architect, engineer, or surveyor. Professional acts are not covered by your general liability policy, whether they are committed by you or someone else.
- The definition of insured contract establishes the types of contracts that are covered by the policy.
- The definition includes the most common kinds of business contracts.
- Any contract in which you assume the tort liability of another party for claims seeking damages for bodily injury or property damage qualifies as an insured contract.