Chances are that you have an indemnity clause in your contract. And, if you are forced to indemnify another party, is that payment covered by insurance? The not so clear answer is maybe and it will depend on your insurance policy, the contract and how your state’s courts interprets both. Regardless, it’s good to know the basics, even if the process makes your head hurt.
What are your indemnity obligations?
Generally speaking, under an indemnity agreement, you agree to indemnify (read “pay”) an upstream contractor or owner for any and all damages they suffer as a result of your negligence which causes bodily injury or property damage. A popular example of an indemnity agreement is found in the AIA A201, paragraph 3.18, which obligates the contractor to indemnify the owner and architect for all claims arising out of the work, provided that the claim, damage, loss or expense is attributable to bodily injury or to injury to or destruction of tangible property (other than the Work itself).
Is your indemnity obligation covered by insurance?
Your indemnity obligations may be insured under your commercial general liability (CGL) insurance, but it’s a complicated path to get there. First, your CGL will cover bodily injury and property damage, but it is subject a number of exclusions.
Once of the exclusions is the contractual liability exclusion. This exclusion states that the insurance does not apply to bodily injury or property damage that the insured is obligated to pay by reason of the assumption of liability in a contract or agreement. Yes, that is very broad. And, might leave you wondering whether you have insurance at all because you wouldn’t be doing this work but for a contract.
But, fear not, there is an exception to the exclusion. The exclusion does not apply to liability for damages assumed in a contract or agreement that is an insured contract.
What’s an insured contract?
An insured contract has a really long definition, but it includes a contract or agreement pertaining to your business under which you assume tort liability of another party to pay for bodily injury or property damage to a third party.
What does that all mean?
Chances are good that you will have coverage for your indemnity obligations, but only if the exception to the exclusion of coverage applies to your situation. Say that three times fast.
If you have any question at all about whether there is coverage you should seek the advice of your insurance company or broker, or your attorney.
Craig, thanks for keeping this issue front and center. In Missouri and Kansas where I primarily practice, I have seen an increasing trend of insurance companies taking over the defense of cases under a reservation of rights. That’s good.