In a previous post, we took a closer look at why contractual liability and insured contracts matter. We explored contractual liability and the CGL policy, the hold harmless and indemnity agreement, and we demonstrated how to pull all of the pieces together with insurance tracking services.
But that’s not the end of contractual liability. In today’s post, we’ll take a look at the little known exclusion and how it can remove this coverage, but most importantly, how your organization can remain protected.
Defining Contractual Liability
Investopedia defines contractual liability as, “an insurance policy that protects against liabilities that the policyholder has assumed from entering into a contract of any nature. Contractual liability insurance indemnifies the policyholder from liabilities that may be expressly stated in the contract, or may be implied by the nature of the obligations listed in the contract.”
As we discussed previously, organizations automatically have contractual liability insurance as part of their CGL policy, which is coverage for the named insured’s liability that is created when it assumes, in an oral or written contract, the financial consequences of another’s negligent acts or omissions that results in bodily injury or property damage to a third party.
A Case Study on Exclusions
In a Texas case examined by IRMI that involved a construction company (contracted to build tennis courts) and a school district, an insurer contended that the CGL policy’s contractual liability exclusion eliminated coverage for defective construction of the courts, so there was no duty to defend the construction company for the suit brought by the school district for damages alleging defective construction to the tennis courts. Specifically, the Fifth Circuit ruled:
“Deficient performance that constitutes a mere breach of contract is not covered by the GL policy because liability for deficient performance is contractual liability excluded under the contractual liability exclusion.”
How The Exclusion Can Remove Coverage
In this case, the court concluded that the “plain meaning” of the phrase “assumption of liability” should be determined by using dictionary definitions and that “liability” is “the state or quality of being legally obligated or accountable”.
Applying this plain meaning approach maintains that a CGL policy is in fact NOT protection for the insured’s poor performance of a contract.
IRMI provides an example to help bring this to life. Consider your organization is a builder (the policyholder in this example) and is contracted to build a structure for a client. Of course, the contract will spell out the scope of work, the costs, and so on for the structure. But the article points out that it’s highly unlikely that either the builder or the client would describe the contract as one that assumes liability.
Your organization is, by contract, accountable to build the structure that is spelled out in a contract and if it’s defective, certainly the client will seek a solution. However, by contract, your organization did not agree to build a defective structure and did not agree to pay damages for that defective structure. Yet, this is often how contracts are categorized: as an assumption of liability.
Why Completed Operations Coverage Is Necessary
Regardless of the industry you’re in, whether construction, real estate, or something entirely different, if you are contracted with a client to perform a job, it can be deemed as “defective”, similar to the above example. This exclusion of coverage may leave you and your organization wondering if you’re really protected under your CGL policy.
This is where additional insured status is absolutely critical. In addition to confirming that a contractual liability exclusion is not present in a CGL policy, it’s important that your organization’s compliance team review additional insured endorsements and verify the correct status to ensure coverage, even after a project is finished. Here’s a quick look at the difference between ongoing operations and completed operations :
- Ongoing Operations: Additional insured status while working; As soon as an individual walks off the job site the status is completed
- Completed Operations: Coverage when work is completed
Are You Sure Your Organization is Covered?
There’s a lot to stay on top of when it comes to insurance and tracking, regardless of the industry you represent. There are ways to stay on top of your insurance tracking without feeling completely overwhelmed. When managing insurance and compliance, it’s best to know how to guard against liability, assess the problem and be proactive in your solutions. An insurance tracking service like myCOI can partner with you and your team to ensure that you’re always adequately protected and that additional insured coverage is in place and always up-to-date.