Insurance Coverage for Contractual Liabilities in Construction: What You Need to Cover Your Ass(ets)
Contractors often struggle to properly evaluate what potential business risks and contractual promises may be covered by their commercial general liability (“CGL”) insurance policies. CGL policies are not the same as surety bonds and do not typically provide coverage for a contractor’s work or product.[1] Many contractors assume they purchased CGL coverage to pay for the other potential risks of doing business, including some contractual promises and exposures related to bodily injury and property damage. However, those contractors may be surprised to find that “exclusions” in CGL policies could result in a contractor being left responsible and paying for unexpected business risks, including liabilities it may have agreed to take on in a contract. It is important that all “exclusions” in CGL policies, including the “contractual liability” exclusion discussed herein, be considered when drafting construction contracts and selecting insurance coverage. Contractual liability coverage can be purchased as an endorsement covering certain designated contracts listed in the endorsement or as blanket contractual liability coverage.
1) What is the Contractual Liability Exclusion?
CGL coverage for business risks, including a liability assumed in a contract, is often fact dependent. Numerous exclusions and exceptions to exclusions often determine coverage. When evaluating coverage, one should first consider at the initial grant of coverage, then at any “exclusions” to coverage, and then at any “exceptions” to the exclusions. CGL policies at issue often contain a “contractual liability” exclusion that excludes coverage, sometimes articulated as follows:
“Bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:
(1) That the insured would have in the absence of the contract or agreement; or
(2) Assumed in a contract or agreement that is an “insured contract”, provided the “bodily injury” or “property damage” occurs subsequent to the execution of the contract or agreement[.][2]
The “contractual liability” exclusion notably applies to an insured’s assumption of “liability” in a written contract. It does not apply to “insured contracts” or to liability “that the insured would have in absence of the contract.” This exclusion generally operates to deny coverage when the insured takes on liability for the conduct of a third party, and does not purchase the additional contractual liability coverage necessary to make the contract an “insured contract.”[3]
2) Recent Decisions Regarding the Contractual Liability Exclusion
Construction and insurance reporters have been flagged for concerns about a recent decision from West Virginia, J.A. St. & Assocs., Inc. v. Bitco Gen. Ins. Corp., related to contractual assumption of risk and insurance coverage.[4] In Bitco, the owner alleged that the contractor’s defective work led to damages, including loss of use of the property, after completion of the work. The owner brought only contractual claims against the contractor because the statute of limitations had run on negligence claims, which was an important fact that may have swayed the court. The operative contract provision considered in Bitco provided as follows:
The written agreements provide that Street “covenants . . . that all the Work shall be performed in a good and workmanlike manner[,]” and that Street “shall provide competent supervision of all phases of the Work and shall cause the Work to be performed with a high degree of expertise and workmanship, so as to provide Owner with Improvements constructed for the general and specific uses to which the Improvements will be put.”[5]
The “contractual liability” exclusion at issue excluded coverage for property damage for which the insured becomes obligated to pay because it assumed liability in a contract or agreement. The West Virginia state court agreed with the contractor’s insurers and found this language to be sufficient to invoke the “contractual liability” exclusion in the contractor’s CGL policy, and excluded coverage for ensuing losses. The court noted that the operative provisions, such as “shall be performed in a good and workmanlike manner” and “high degree of expertise and workmanship” rise to the level of assuming “liability” for the ensuing losses of defective work. Notably, and possibly alarmingly, the provision did not include language clearly identifying the assumption of “liability” or other similar trigger language such as “hold harmless” or “indemnity.”
3) The Contractual Liability Exclusion in Louisiana
Published Louisiana cases often consider contractual risk allocation to bar coverage. In Broadmoor Anderson, the court considered the following contractual provision and whether the CGL policy exclusion for liabilities assumed via contract applied:
“The Contractor [BRAC] shall be responsible to the Owner [Hollywood] for acts and omissions of … Subcontractor [T–Z]….”[6]
The insurer alleged that the language “shall be responsible” triggered the contractual liability exclusion. The contractual liability exclusion at issue stated that coverage is exclude when the insured is obligated to pay damages because it assumed liability in a contract. The insurer argued this was an assumption of the subcontractor’s liability, akin to indemnification, and that the exclusion for assumed liability applied to exclude coverage.
The court noted that this exclusion has been argued by insurers to broadly exclude coverage for the liability under any contract of the insured contractor. As that argument goes, in any contractual undertaking, the insured/contracting party assumes a contractual performance obligation and liability from non-performance is excluded from CGL coverage. This broad interpretation of the “assumption of liability” exclusion has been rejected by Louisiana courts.
The court determined the contractor first obligated itself directly to the owner for the work on the entire project. This also included the performance of the subcontractor’s work. Coverage for the “work” itself was clearly excluded. But the court also determined that “… shall be responsible” was not enough to create an indemnity obligation. An indemnity obligation would likely need to include an additional promise that the contractor would be responsible and liable for the subcontractor’s work, with the liability including ensuing losses flowing from the defective work. Absent that additional language, the court determined that the contractor did not assume additional liabilities and, therefore, the exclusion did not apply.
In short, Louisiana courts may require more than a promise of “responsibility” to invoke the “contractual liability” exclusion. Broadmoor Anderson suggests that promises in the form of a hold harmless or other indemnity agreement may invoke the exclusion, but that “… shall be responsible” simply reiterated the contractor’s initial promise to the owner to provide work free of defects, including the work of its subcontractors.
4) Lessons for Contract Drafting and Procuring Insurance
Every contract is different, and certain jobs may require different promises between the owner, design professionals, general contractor, and subcontractors. When negotiating contract language related to responsibilities, liabilities, hold harmless agreements, and/or indemnity agreements, it would be wise to consider whether the promise is one that the party would have even if the contract did not exist. It is also important to consider whether this contract may result in an insurer attempting to exclude coverage based on the “contractual liability” exclusion, and whether additional coverage should be purchased before executing the contract.
This issue of CGL coverage for contractual liabilities is also important to the owner/developer. An owner rarely benefits from its contractors and/or subcontractors failing to obtain coverage for such risks in the event the work leads to ensuing losses. If the contractor or subcontractor does not have coverage, this may affect whether the contractor can pay for the owner’s losses. Thus, it is important for the owner/developer to make sure the contractor has obtained coverage for those liabilities. This is especially true for smaller contractors working on large projects.
We have extensive experience in drafting, negotiating, and litigating varied construction contracts, including necessary modifications of standard AIA contracts and custom contracts, and can help you understand and properly prepare contractual risk provisions, hold harmless agreements, indemnity agreements, assumption of liabilities, and responsibilities. If you have any questions regarding how language in your contracts could expose you under your current coverages, let us help you cover your ass(ets).
[1] The Louisiana Supreme Court has consistently emphasized that a CGL policy is not written to guarantee the quality of the insured’s work or product. See, e.g., Supreme Services & Specialty Co., Inc. v. Sonny Greer, Inc., 958 So. 2d 634, 641 (La. 2007).
[2] J.A. St. & Assocs., Inc. v. Bitco Gen. Ins. Corp., No. 17-0079, 2019 WL 1949710, at *11 (W. Va. May 1, 2019).
[3] Stewart Interior Contractors, L.L.C. v. Metalpro Indus., L.L.C., 2007-0251 (La. App. 4 Cir. 10/10/07), 969 So. 2d 653, 663.
[4] https://www.businessinsurance.com/article/20190502/NEWS06/912328239;
[5] Bitco, 2019 WL 1949710, at *2.
[6] Broadmoor Anderson v. Nat’l Union Fire Ins. Co. of Louisiana, 40,096 (La. App. 2 Cir. 9/28/05), 912 So. 2d 400, 406–07, writ denied, 2005-2462 (La. 3/24/06), 925 So. 2d 1239.
