Assuming the Liability of Others

Summary: In terms of insurable liability, there are several ways that the insured can become legally obligated for damages: (1) through negligence—the insured's or that of someone for whose actions the insured bears the responsibility; (2) through statute as in workers compensation or dram shop laws; and (3) through assuming liability.

It is with assumed liability—including assuming the liability of another—that this discussion is concerned. As an example of this: if A becomes liable to C, a third party, then B (who has assumed A's liability) will pay damages to C for A.

The contractual liability coverage under the commercial general liability coverage form (insured contract) is the basis of the discussion.

Topics covered: Legal basis Contractual liability insurance Insured contracts Contracts not considered insured contracts Indemnify v. pay on behalf of Contractual liability limitation

Legal Basis

When one party agrees with another that the other shall be free from liability (that is, held harmless) in given circumstances, or that the other party will be indemnified for liability incurred, the first party (the indemnitor) has assumed the liability of the other (the indemnitee).

Some situations wherein this type of agreement could arise are: a person leasing or using property or equipment agrees to hold harmless the owner of that property or equipment; a subcontractor agrees to hold harmless the general contractor; the manufacturer of a product agrees to hold harmless the seller of that product. Additionally, many other business transactions involve assumptions of liability in one form or another; purchase order agreements, maritime agreements, and service agreements are some of the more common. An employer may even find itself liable to its own employees where they are able to lodge claims against another entity and the employer has assumed that other entity's liability.

As an illustration of the assumption of liability—a contractor is to put up a building. The contract between the builder and the owner includes an agreement to the effect that the contractor will save and hold harmless the owner against liability in connection with the construction. A third party is injured at the site and brings suit against the owner. The ultimate obligation to pay any judgment or settlement then falls upon the contractor; in agreeing that the owner will be held harmless, the contractor has assumed this liability.

Hold harmless agreements, sometimes referred to as contracts of indemnity, are so generally used in contracts and other legal agreements as to subject almost every organization or entity to their provisions at some time or another. The consequences of such assumption agreements may range from an innocuous agreement to be responsible for one's own negligence to contractual obligations so serious in nature as to be adjudged "contrary to public policy." Assumption agreements are not always readily identified, often appearing as one of numerous clauses in a lengthy contract. It is sometimes difficult to make the party who has accepted such a condition understand that this is an assumption of liability and that it places that party in a potentially difficult situation for which insurance protection is needed.

Though courts do scrutinize these transfers of responsibility, they are quite generally upheld and enforced as long as the parties to the agreement express in clear and unequivocal terms the intent to shift liability, and if this does not run counter to any statute or public policy. Those who find themselves responsible for liability that they have assumed in this way are often baffled that what they thought of as a private agreement freeing another party from liability imposes the burden upon themselves. What they have not understood is that the courts will not permit a private agreement between two parties to interfere with the legal rights of a person or organization who is not a party to the agreement; that is, an injured party's rights to compensation will not be inhibited simply due to a contract between two other entities.

Note that, sometimes, contracts do not contain any specific assumptions of liability, but provide that the insured shall purchase liability insurance for the other party or that the other party shall be made an additional insured under the insured's liability insurance. These constitute performance agreements on the part of the insured. Though the intended result may be the same, such agreements do not represent contractual assumptions of liability. A careful distinction must be maintained between an insured's contractual obligation to provide goods or a service or a performance (not covered), and an insured's contractual obligation to take on the liability exposure of the other party (covered under an insurance policy's terms).