Contractual Liability, Insured Contracts and Additional Insureds

Businesses move risk to each other by contract. A landlord has a tenant promise to answer for customers hurt in the store, a general contractor has a subcontractor promise to answer for the subcontractor’s work, and a city requires a contractor to name it on the contractor’s policy. Each promise creates liability the promisor would not otherwise have, and a liability policy does not follow it automatically. The sections below work through how the standard commercial general liability form (CG 00 01 04 13) treats liability assumed by contract, what each kind of “insured contract” covers, how an additional insured endorsement differs from an insured contract, and how the pollution exclusion decides which environmental claims the policy answers. Names and figures in the examples are invented.

Hold-Harmless and Indemnity Agreements

A hold-harmless or indemnity agreement is a contract term in which one party, the indemnitor, agrees to pay for or protect the other, the indemnitee, against claims. The two words are used loosely and mean the same in most contracts. What matters is the scope the clause reaches, and practice sorts clauses into three.

• Limited form. The indemnitor answers only for claims caused by the indemnitor’s own negligence.
• Intermediate form. The indemnitor answers for claims arising out of its work even if the indemnitee is partly at fault, but not for claims caused solely by the indemnitee.
• Broad form. The indemnitor answers for every claim connected to the work, including one caused entirely by the indemnitee’s negligence.

Whether a clause of the second or third kind is enforceable is a question of state law, and some states limit it in construction contracts. A producer should never tell a client that a clause is valid. The policy responds to liability the contract validly creates, and a lawyer decides what that is.

Why the Policy Excludes It, and What It Gives Back

An insurer prices a policyholder’s exposure to its own negligence. It cannot price every promise a policyholder makes in every contract it signs. So the form excludes 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. Two exceptions return the coverage (CG 00 01 04 13, Section I, Coverage A, exclusion b).

1. Liability the insured would have without the contract. A promise to pay for harm you would have to pay for anyway adds nothing, so the exclusion does not apply.
2. Liability assumed in an “insured contract”. The injury or damage must occur after the contract is signed. A promise cannot pay for harm that happened before the promise existed.

The second exception also treats an indemnitee’s attorneys’ fees and litigation expenses as damages, but only if the insured has also assumed the indemnitee’s defense in the same contract and the fees are for defense of a civil or alternative dispute proceeding in which covered damages are alleged.

What Counts as an Insured Contract

The form defines “insured contract” in six parts (CG 00 01 04 13, Section V, definition 9). Each is an exception to the exclusion, and several carry limits of their own.

Part	Kind of contract	What the form leaves out
a	Lease of premises	The part that indemnifies anyone for fire damage to premises rented to or temporarily occupied by you
b	Sidetrack agreement	Nothing
c	Easement or license agreement	Easements and licenses in connection with construction or demolition on or within 50 feet of a railroad
d	Obligation, as required by ordinance, to indemnify a municipality	Work for a municipality
e	Elevator maintenance agreement	Nothing
f	That part of any other 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	Railroad construction within 50 feet, certain architect and engineer liability, and an architect’s or engineer’s own professional liability

Part f is the broadest and the one that matters most in practice. It is also the part that picks up an indemnity for a municipality in connection with work performed for it, which part d does not.

Tort liability, for part f, means liability that would be imposed by law in the absence of any contract. Part f therefore reaches the indemnitee’s liability to a third person for bodily injury or property damage, and not a promise to pay the indemnitee’s own contract losses.

Each Part in a Case

Lease of premises. Brightwater Bakery leases a Grand Rapids storefront. The lease says Brightwater will hold the landlord harmless for injuries to customers on the premises. A customer slips on the sidewalk entry and sues the landlord. The lease is an insured contract, so Brightwater’s liability policy answers for what Brightwater assumed, subject to its limit. If the same lease also makes Brightwater indemnify the landlord for fire damage to the building, that part of the lease is not an insured contract.

Sidetrack agreement. A lumber yard in Muskegon signs an agreement with a railroad to use a spur track. The agreement makes the yard answer for injury or damage the spur causes. A railroad conductor is hurt by a loose pallet. The yard’s assumed liability is covered.

Easement or license. A farm stand pays a neighbor for the right to run a water line across the neighbor’s land. The easement agreement makes the stand answer for claims arising from the line. A passerby trips on an exposed pipe. The assumed liability is covered, because the easement is not for construction near a railroad.

Municipal ordinance. A city ordinance requires any business that opens a sidewalk to indemnify the city for claims. A plumber opens one, a pedestrian falls, and the city is sued. The plumber’s assumed liability is covered.

Elevator maintenance. A building owner’s elevator maintenance contract says the owner will hold the service company harmless for claims by riders. A rider is hurt by a malfunction and sues the service company. The liability the owner assumed is covered under the owner’s policy.

Tort liability of another (part f). Cobalt Electrical subcontracts under Hollis Builders. The subcontract says Cobalt will indemnify Hollis for claims arising from Cobalt’s work. This is the next example in full.

Worked Case: A Subcontractor’s Employee Is Hurt

Hollis Builders is the general contractor on a medical office building. It subcontracts the electrical work to Cobalt Electrical. The subcontract states that Cobalt will indemnify Hollis against claims by third persons arising from Cobalt’s work and will defend Hollis against such claims. Cobalt carries a CG 00 01 form with a $1,000,000 each occurrence limit.

A Cobalt electrician is injured when a ladder collapses. His workers’ compensation benefits are his remedy against his employer (MCL 418.131(1)), so he sues Hollis alone. Hollis tenders the suit to Cobalt. The question is whether Cobalt’s liability insurer must respond.

1. The contract exclusion. Cobalt is obligated to pay damages because it assumed Hollis’s liability in a contract. The exclusion applies unless an exception does too.
2. The insured contract exception. The subcontract is a contract pertaining to Cobalt’s business under which Cobalt assumes the tort liability of Hollis to pay for bodily injury to a third person. That is part f. The injury occurred after the subcontract was signed. The exception applies.
3. The employer’s liability exclusion. The electrician is Cobalt’s employee, and the form excludes bodily injury to the insured’s employee in the course of employment. The exclusion applies whether the insured is liable as an employer or in any other capacity, and it reaches any obligation to share damages with or repay someone else. It then states that it does not apply to liability assumed by the insured under an insured contract (CG 00 01 04 13, exclusion e). Cobalt’s indemnity to Hollis is liability assumed under an insured contract, so the exclusion does not bar it.
4. Who pays what. Suppose Hollis is found liable for $150,000, and its own attorneys’ fees to defend are $22,000. The result depends on whether the insurer takes over Hollis’s defense.

If	Cost of Hollis’s defense	Effect on Cobalt’s $1,000,000 limit	Limit left
The insurer defends Hollis as indemnitee under the Supplementary Payments conditions	Paid as supplementary payments, outside the limit	$150,000 damages reduce it	$850,000
The insurer does not defend Hollis, and Cobalt reimburses Hollis’s $22,000 fees	Treated as damages, because the contract assumed Hollis’s defense	$150,000 + $22,000 = $172,000 reduces it	$828,000

The insurer defends the indemnitee only if it is defending an insured against a suit in which the indemnitee is also named, and only when further conditions are met. They include that the suit seeks damages the insured assumed in an insured contract, the contract also assumed the indemnitee’s defense, no conflict appears between insured and indemnitee, both ask the insurer to control the defense and agree to the same counsel, and the indemnitee agrees in writing to cooperate and gives written authorization (CG 00 01 04 13, Supplementary Payments, paragraph 2). Fees paid that way do not reduce the limit. Here the electrician sued Hollis alone, so Cobalt is not a defendant and the first row does not apply: the second row is the result. Had he sued both, the first would. A producer whose client signs indemnity agreements should check that the contract really does assume the defense, since that term decides whether the fees count as damages.

The same subject appears in the personal and advertising injury coverage, with a narrower rule. Its contractual liability exclusion has only one exception, for liability the insured would have without the contract. It has no insured contract exception, so a promise to indemnify someone for an advertising injury claim is not covered.

The business auto form has its own contractual exclusion and its own insured contract definition, which follows the same parts, without the elevator maintenance agreement, and adds a contract for rental or lease of an auto, which does not extend to the cost of damage to the rented auto itself (CA 00 01 03 10, Section II, exclusion 2 and Section V, definition H). A lessor’s own status as an insured is a separate problem, taken up below.

Additional Insureds

An insured contract makes the insurer pay for what the named insured promised. An additional insured endorsement goes further: it makes another person or organization an insured under the named insured’s policy, with a right to defense and coverage in its own name.

The standard endorsement for owners, lessees or contractors names the scheduled person or organization as an additional insured, but only for liability for bodily injury, property damage or personal and advertising injury caused, in whole or in part, by the named insured’s acts or omissions, or those of persons acting on its behalf, in the performance of ongoing operations for the additional insured at the scheduled location (CG 20 10 04 13, paragraph A).

Three limits are written into that wording.

• Caused in whole or in part by the named insured. If an accident is caused only by the additional insured’s own negligence, with no contribution from the named insured, the endorsement does not respond.
• Not broader than the contract. If a contract requires the coverage, the insurance given to the additional insured will not be broader than the contract requires. The coverage applies only to the extent permitted by law.
• Ongoing operations only. The endorsement excludes bodily injury or property damage occurring after all work on the project has been completed, or after the portion of the named insured’s work that caused the injury has been put to its intended use, other than by another contractor on the same project (paragraph B).

Where a contract requires the coverage, the endorsement also caps what the insurer pays for the additional insured at the lesser of the amount the contract requires or the amount available under the policy’s limits, and it does not increase those limits (paragraph C).

The cap works as follows when a subcontract such as Hollis’s requires a stated amount of insurance for the additional insured.

Contract requires	Cobalt’s policy limit	Available to Hollis as additional insured
$1,000,000	$2,000,000	$1,000,000, the lesser
$3,000,000	$2,000,000	$2,000,000, the lesser, before any amount already paid for Cobalt or others
$1,000,000	$1,000,000	$1,000,000, shared with Cobalt’s own claims

The last column shows why a policy with a small limit may not satisfy a large contract: the additional insured shares the same limit as everyone else.

Insured Contract Compared With Additional Insured

	Insured contract	Additional insured
Who is the insured	The named insured, for liability it assumed	The other party, directly
What triggers it	The named insured’s promise in the contract	A scheduled endorsement naming the person
Whose fault	The indemnitee’s liability, as far as the contract assumes it	Only injury caused in whole or in part by the named insured
Defense of the other party	Only if the insurer’s conditions are met	The additional insured is an insured, so the policy’s defense duty runs to it
Completed work	Depends on the contract	Excluded after the work is complete

Many contracts ask for both: an indemnity clause and additional insured status. The two overlap, and the policy that responds depends on the wording of each. When the named insured is itself an additional insured on someone else’s policy, the form’s other insurance condition makes it excess over any other primary insurance available to it for liability arising out of premises, operations or products and completed operations for which it was added (CG 00 01 04 13, Section IV, Condition 4.b.(1)(b)).

The Auto Lessor

A business that rents a truck from a lessor often signs a lease promising to protect the lessor. The standard business auto form makes insureds of anyone using a covered auto with the named insured’s permission, but it excludes the owner of a covered auto the named insured hires or borrows, or anyone else from whom it is hired or borrowed (CA 00 01 03 10, Section II, A.1.b.(1)). A lessor is therefore not an insured under the lessee’s policy unless an endorsement adds it. Lessors usually require one.

Pollution: What the Form Takes Away and What Can Be Added

The commercial general liability form excludes bodily injury and property damage arising out of the discharge, dispersal, seepage, migration, release or escape of pollutants in listed settings (CG 00 01 04 13, exclusion f).

• At or from premises the insured owns, occupies, rents or has loaned.
• At or from a site used to handle, store, dispose of, process or treat waste.
• Pollutants transported, handled, stored, treated, disposed of or processed as waste by or for any insured or anyone the insured is legally responsible for.
• At or from a site where an insured or its contractors perform operations if the pollutants are brought there in connection with those operations.
• At or from a site where the operations are to test for, monitor, clean up or respond to pollutants.

It also excludes loss, cost or expense arising from a governmental or other demand or order that anyone test for, monitor or clean up pollutants, and claims by a governmental authority for those costs. Exceptions give some coverage back. They include bodily injury inside a building caused by smoke or fumes from heating, cooling or water-heating equipment, fuels and fluids escaping from mobile equipment parts designed to hold them, smoke or fumes from a hostile fire, and, for a contractor, liability at a site owned or occupied by a customer who has been added to the contractor’s policy as an additional insured.

Four Claims

1. A restaurant’s fuel oil tank leaks into the soil beneath its own building. The leak is at premises the insured owns or occupies, so the exclusion applies.
2. A paving contractor’s backhoe breaks a hydraulic line and fluid runs across a client’s lot. Fluids escaping from a part designed to hold them in mobile equipment are within the exception, unless the discharge was intentional. The claim is covered.
3. A tenant’s furnace malfunctions and fumes injure an employee of another tenant. Bodily injury inside a building caused by fumes from heating equipment is within the exception.
4. A state agency orders a dry cleaner to remediate solvents. A governmental order to clean up is within the exclusion, and the dry cleaner has no coverage under the form.

The Pollution Coverage Extension

Where the exclusion leaves a client exposed, the gap is closed by an endorsement to the general liability policy or by a separate pollution liability policy. The wording differs by insurer, so the producer reads three things on it: which sites and operations it covers, whether it responds only to bodily injury and property damage or also to cleanup costs, and whether it applies on an occurrence basis or only to claims made and reported within a period.

Lesson summary

• A hold-harmless agreement moves liability by contract. The commercial general liability form excludes assumed liability, except liability the insured would have anyway and liability assumed in an insured contract for injury occurring after the contract was signed.
• An insured contract has six parts: lease of premises, sidetrack agreement, easement or license, ordinance-required municipal indemnity, elevator maintenance and the tort liability of another assumed in a contract pertaining to the insured’s business.
• Part f is the broadest, and it covers tort liability assumed for injury to a third person, not the indemnitee’s contract breaches.
• The employer’s liability exclusion does not apply to liability assumed under an insured contract.
• An indemnitee’s defense costs are treated as damages that reduce the limit unless the insurer defends the indemnitee under the Supplementary Payments conditions, when they are paid outside the limit.
• An additional insured is an insured in its own right, but only for injury caused in whole or in part by the named insured, during ongoing operations, and up to the lesser of the contract’s required limit and the policy limit.
• The pollution exclusion removes owned-site, waste, operations-site and cleanup claims, with exceptions for heating equipment fumes, mobile equipment fluids and hostile fire. A pollution extension or separate policy must be read for its sites, its covered costs and its trigger.