Commercial General Liability (CGL) policies contain a CONTRACTUAL LIABILITY EXCLUSION (see adjacent picture). The contractual liability exclusion operates to BAR personal injury and property damage claims “which the insured is obligated to pay by reason of the assumption of liability in a contract or agreement.” Think indemnification claims which are assumption of liability claims and common in construction.
But, and this is an important but, there are two exceptions to this exclusion.
First, the contractual liability exclusion does not apply to liability for damages “that the insured would have in the absence of the contract or agreement.” Think tort claims.
Second, the contractual liability exclusion does not apply to liability for damages “assumed in a contract or agreement that is an ‘insured contract’.” The key to this exception is the definition of an “insured contract.”
Applicable to construction, a key definition of an “insured contract” is “that part of any contract…pertaining to your business…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization.” This portion of the “insured contract” definition should ideally bring contractual indemnification claims back into play so that contractual indemnification claims are not barred by the contractual liability exclusion.
Be careful, though. There are endorsements to CGL policies that have modified the definition of “insured contract” to either remove the aforementioned definition all together, meaning contractual indemnification claims would be excluded. This is a bad endorsement to the definition of “insured contract” if you are involved in construction.
Or, this key definition of “insured contract” has been narrowed to include the following underlined language “that part of any contract…pertaining to your business…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization, provided the bodily injury or property damage is caused, in whole or in part, by you or those acting on your behalf.” This means that if you contractually agree to indemnify another for that person’s negligence, this would not meet the definition of “insured contract” since you are agreeing to indemnify another for negligence not caused in whole or in part by you.
For example, the opinion in Mid-Continent Casualty Co. v. Royal Crane, LLC, 2015 WL 3609062 (Fla. 4th DCA 2015), discusses this narrowed definition of “insured contract” with the underlined language above. In this case, a subcontractor leased a crane and crane operator from a rental company. The rental agreement between the subcontractor and rental company contained the following contractual indemnification language:
“Lessee [subcontractor] agrees to indemnify, defend and hold harmless Lessor [rental company], its employees, operators and agents from any and all claims for damage to property, damage to the work or bodily injury (including death) resulting from the use, operation, or possession of the crane and operator whether or not it be claimed or found that such damage or injury resulted in whole or in part from Lessor’s negligence, from a defective condition of the crane or operator or from any act, omission or default of Lessor.”
In other words, the subcontractor was agreeing to indemnify the rental company for the rental company’s negligence. This is known as a broad form indemnification provision.
During construction, a worker was hurt when a truss fell from the crane. The worker sued the rental company and the crane operator for negligence. The rental company and operator third-partied in the subcontractor based on the contractual indemnification provision in the rental agreement. However, the subcontractor’s CGL insurer denied coverage (and, thus, a defense in the lawsuit) based on the contractual liability exclusion.
As a consequence of the CGL insurer’s immediate denial of coverage, the subcontractor entered into a Coblentz settlement agreement with the rental company that allowed the rental company to sue the subcontractor’s CGL’s insurer for its wrongful refusal to deny the subcontractor a defense and for coverage under the subcontractor’s policy.
Coblentz Settlement Agreement
In a nutshell, a Coblentz settlement agreement is an agreement between an insured and a third-party claimant where the insurer denied coverage and, thus, the duty to defend its insured in an underlying lawsuit. The insured agrees to give the claimant a consent judgment to resolve the lawsuit and an assignment of its rights under its CGL policy to the claimant in exchange for the claimant not enforcing the consent judgment against the insured. This allows the claimant to now sue the insured’s CGL insurer directly to enforce the consent judgment. In doing so, the claimant must still prove: (a) the insurer wrongly refused to defend its insured, (b) there is coverage under the policy, and (3) the negotiated consent judgment was made in good faith and is reasonable. But, the consent judgment prevents the insurer from trying to argue the liability of the insured since that could have been argued in the underlying lawsuit that the insurer refused to defend its insured in. See Royal Crane, supra, at *4-5. (For more information on Coblentz settlement agreements, check out this presentation that discusses this in detail.)
“Insured Contract”
But, the heart of the case really pertained to the contractual liability exclusion and the definition of an “insured contract” as narrowed by endorsement. With respect to the definition of “insured contract” in the policy (see above language), the Fourth District Court of Appeals importantly held:
“[A]n indemnity agreement can be an ‘insured contract’ under the policy where the injury is caused by the indemnitee’s negligence, so long as the named insured ‘caused’ some part of the injuries or damages or is otherwise vicariously liable.”
Royal Crane, supra, at *7.
In other words, taking the above fact pattern, the indemnity agreement could constitute an “insured contract” to be excepted from the contractual liability exclusion if the worker’s injury was caused by the rental company’s (indemnitee) negligence, so long as the subcontractor (named insured in the CGL policy) caused some part of the injuries or was otherwise vicariously liable to the rental company for the injuries.
Unfortunately for the rental company, even under this favorable definition of an “insured contract”, the rental company’s third-party complaint against the subcontractor still did not trigger a duty of subcontractor’s CGL insurer to defend and cover the subcontractor:
“Hunter Crane’s [indemnitee-rental company] third party complaint did not assert a legal theory under which Cloutier [insured-subcontractor] can be said to have ‘caused’ the injury in whole or in part. No allegation described how Cloutier contributed to causing the accident. No allegation attempted to invoke the borrowed servant doctrine, which dictates that ‘one who borrows and exercises control over the servant or worker of another in effect assumes all liability for the activities of the borrowed servant or worker.’ Nor did the third party complaint cast Cloutier as the employer of an independent contractor who actively participated in or interfered with the job to the extent that it directly influenced the manner in which the work was performed.”
Royal Crane, supra, at *7 (internal quotations omitted).
For this reason, the Fourth District sided with the CGL insurer finding that the contractual liability exclusion barred coverage to the subcontractor such that the CGL insurer had no duty to defend or cover the subcontractor in the underlying litigation. This also meant that the rental company’s Coblentz settlement agreement provided it no value because it already agreed to give up rights to collect against the subcontractor and it could no longer collect against the subcontractor’s CGL insurer. What this case does exemplify, however, is the importance of pleading allegations to maximize insurance coverage as well as a more relaxed definition of an “insured contract” to hopefully prevent the application of the contractual liability exclusion.
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.