What Is an Insured Contract Under a CGL Policy?

A Commercial General Liability (CGL) policy protects businesses from common liability claims, such as bodily injury or property damage to third parties from operations, premises, products, or completed work. CGL policies typically exclude liability a business assumes under a contract. However, an important exception exists for “insured contracts.” Understanding this concept is crucial for businesses.

Contractual Liability and CGL Policies

Businesses often enter agreements where they promise to take on financial responsibility for certain risks or damages that would ordinarily fall to another party. This is known as contractual liability, where one party agrees to indemnify or hold harmless another for specific liabilities. For example, a contractor might agree to be responsible for damage caused to a property owner’s premises during construction.

Commercial General Liability policies typically exclude contractual liability, meaning they do not cover bodily injury or property damage an insured is obligated to pay due to assuming liability in a contract. Insurers implement this exclusion to cover risks inherent in a business’s operations, not additional liabilities voluntarily assumed. Without this exclusion, businesses could take on unlimited liabilities, making risk assessment and pricing difficult.

However, CGL policies feature a significant exception to this contractual liability exclusion. This exception restores coverage for specific types of agreements defined as “insured contracts.” The inclusion of this exception is important for many businesses, as it ensures that common contractual arrangements involving the transfer of tort liability can still receive CGL coverage. This allows for necessary risk allocation in business relationships while maintaining insurance protection.

What Constitutes an Insured Contract

A standard Commercial General Liability policy defines an “insured contract” as an agreement where the contractual liability exclusion does not apply. Generally, an insured contract involves the assumption of another party’s tort liability for bodily injury or property damage to a third party. Tort liability refers to civil wrongs that cause a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act, such as negligence.

For an agreement to qualify as an insured contract, the liability assumed must typically relate to bodily injury or property damage that would otherwise be considered a tort. This means the policy covers situations where the insured agrees to be responsible for someone else’s negligence that leads to physical harm or property destruction. It does not extend to breaches of contract or other purely economic losses. The definition also specifies that the insured is taking on the liability of “another party,” distinguishing it from the insured’s own direct liability.

Most CGL policies specify that the assumption of tort liability must be in a written contract or agreement for certain types of insured contracts. While some types of insured contracts may not explicitly require a written agreement, having a clear, documented contract is always advisable for establishing the terms of assumed liability. These definitions aim to provide coverage for common indemnification provisions in various business agreements, facilitating standard commercial practices.

Common Types of Insured Contracts

Standard CGL policies typically enumerate specific types of agreements that qualify as insured contracts, recognizing their prevalence in business operations.

Lease of premises: A tenant might agree to indemnify the landlord for tort liability arising from the leased property. This ensures the tenant’s CGL policy can respond if a third party is injured due to conditions on the leased premises, and the tenant assumed that responsibility.
Sidetrack agreements: Arrangements between a railroad and a business concerning a railway spur line, where the business often assumes liability for injuries or damages related to the sidetrack.
Easement or license agreements: Excluding those related to construction or demolition, these often contain indemnification clauses covering liabilities tied to the use of shared property.
Agreements required by municipal ordinances: Such as those related to permits for certain activities, where a business assumes liability for potential public injuries or property damage.
Elevator maintenance agreements: Frequently include provisions where the maintenance company assumes tort liability for injuries arising from elevator operations.

Coverage Limitations for Insured Contracts

While the “insured contract” provision restores coverage by overriding the contractual liability exclusion, it does not provide unlimited protection. Being an insured contract only means that the contractual liability exclusion will not apply; all other standard CGL policy terms, conditions, and exclusions remain in effect. This means that even if an agreement qualifies as an insured contract, coverage for a claim may still be denied if another exclusion in the policy applies.

For instance, the Employer’s Liability exclusion typically removes coverage for bodily injury to an employee of the insured, even if that liability is assumed under an insured contract. Similarly, the Professional Services exclusion often precludes coverage for claims arising from the rendering or failure to render professional services. Other common exclusions that can still apply include the Expected or Intended Injury exclusion for intentional acts, and exclusions for property damage to the insured’s own work or products.

CGL policies generally contain exclusions for pollution-related incidents and may not cover punitive damages, even if an insured contract obligates the insured to pay them. It is important to remember that assumed liability must be for tort liability, not for a breach of contract or an agreement to pay financial obligations. Therefore, a thorough review of the entire CGL policy is essential to understand the full scope of coverage and any remaining limitations.