Lease of premises

Easement or license agreements

An obligation required by a municipality

Sidetrack agreement

Elevator maintenance agreement

Tort liability contractual assumptions

Mutual or reciprocal agreements: involve tort liability or not?

The meaning of tort liability

What "insured contract" does not include

When a contract must be executed

The Mechanics of Contractual Liability Coverage

When the Insurance Services Office (ISO) introduced the "plain English" approach to its commercial general liability provisions in 1986, many of the coverage concepts were taken from earlier policy provisions, but worded in a more simplistic way. One of these coverages was contractual liability.

Contractual liability insurance can be defined as 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. To better understand contractual liability coverage as provided by a CGL policy, it is good to have some knowledge of the mechanics required. First, apart from the insurer and the claimant, there are two important parties: the indemnitor and the indemnitee. The indemnitor is the one who agrees to hold harmless the other party who is referred to as the indemnitee. (One way to distinguish between these two parties is to refer to the letters "o" and "r" and remember that the indemnitor has to agree to take the assumption "or" not be hired for the job by the indemnitee.)

Contractual liability involves the financial consequences emanating from liability, and not the assumption of the indemnitee's liability itself. The reason is that once the indemnitee accidentally causes or allegedly causes injury or damage to a third party, the indemnitee still remains answerable for that liability. Thus, liability to a third party for injury or damage cannot be assumed by anyone other than the one who caused the injury or damage. What is being transferred by the indemnitor to the indemnitee, instead, are the financial consequences (i.e., money damages) of the determined indemnitee's liability. To put it in another perspective, assume the indemnitor agrees to hold harmless the indemnitee for injury to a third party. As a result of the indemnitee's act or omission, a third party is injured and sues the indemnitee. Provided such an agreement is otherwise permitted by law, it becomes the indemnitor's responsibility to pay for the damages awarded, if it is determined that the indemnitee ultimately is liable.

An important point to keep in mind here, also, is who it is that is covered for contractual liability. All too often, the terms "named insured" and "insured" are bantered about and sometimes used as though they are one and the same. The standard ISO CGL policy, for example, refers to both terms in its contractual liability exclusion and exception, but reserves coverage to the named insured in certain circumstances, such as subpart f. of the insured contract definition. This means who is covered for contractual liability or who is precluded from coverage will hinge on who is the named insured or who is an insured. (At least one insurer has introduced an endorsement to its CGL policy making contractual liability coverage provisions apply solely to named insureds.)

Another important aspect of the contractual liability mechanics is recognizing the fact that the terms "hold harmless", "indemnify", and "defend" differ. In fact, it is not unusual to see all three terms in a contractual agreement. Reference to the term "hold harmless" means an agreement to assume the financial consequences of another's liability. "Indemnify" means to reimburse damages and defense costs; it does not include the obligation to defend. If an indemnitee wants to be defended, it must say so in its contract. Whether an insurer has to provide a defense hinges on certain conditions precedent which may not always be possible to meet.

Restrictions on Liability Assumed—Exceptions

Not all assumptions having to do with the financial consequences of liability between an indemnitor and indemnitee are the subject of insurance. This is made clear by the statement in exclusion 2.b. (contractual liability) of the standard ISO CGL coverage forms for both the occurrence and claims-made types. This exclusion states that "this insurance does not apply to 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". This exclusion then makes exceptions by stating when the exclusion does not apply to damages for liability.

The first of these exceptions is when the insured would have been liable even in the absence of contract or agreement. Since this statement appears to cause some confusion, additional comment is necessary. Not to over-simplify matters, but everyone has a common law obligation or duty to exercise care so as to not impair the health, safety and welfare of others. Thus, if a person through his or her acts or omissions causes accidental injury to another person or damage to that person's property, the party causing that damage is responsible for such actions, whether or not there is any promise to do so. That common law duty is now embodied in the law of negligence and other torts (civil wrongs).

Let's take the example of a tenant of a building who agrees in writing to hold harmless, defend and indemnify the landlord for injury or damage caused solely by the tenant's acts or omissions. Whether this agreement is in writing or not should not matter. The reason is that the tenant is responsible for its acts or omissions under both common law and its successor statutes. So, if the tenant were to negligently cause injury to a business invitee who, in turn, makes claim against the landlord, the tenant would be answerable for that injury, even in the absence of a contract or agreement agreeing to be accountable. (What may beg a question here is: since common law liability involves liability for damages that the insured would have in the absence of a contract or agreement, what coverage would apply to such liability, since it is not considered to be contractual liability. For purposes of categorizing the coverage and claims for underwriting or claims statistical purposes, the appropriate coverage is premises-operations liability, and not contractual liability.)

The next exception of when the exclusion for liability assumed under a contract or agreement does not apply is liability for damages assumed in a contract or agreement that is an "insured contract" To identify precisely what this entails, one must refer to the CGL;s definition of insured contract which lists the following kinds of contracts:

1. Lease of premises. However, that portion of the contract for a lease of premises that indemnifies any person or organization for damage by fire to premises while rented to you or temporarily occupied by you with permission of the owner is not an insured contract;
2. A sidetrack agreement;
3. Any easement or license agreement, except in connection with construction or demolition operations on or within 50 feet of any railroad;
4. An obligation, as required by ordinance, to indemnify a municipality, except in connection with work for a municipality;
5. An elevator maintenance agreement.
6. That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work for a municipality) under which you assume the tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization. Tort liability, as referenced herein, means a liability that would be imposed by law in the absence of any contract or agreement.

It is important to keep in mind the first five kinds of contracts (a. thru e.), because these are almost always provided; whereas the latter kind of contract in subpart f. is not always provided, or is provided in more limited form. (Note that some underwriters have at their disposal endorsements that can amend contractual liability coverage to the point where the coverage provided can be more limited than what is otherwise necessary to comply with a valid and enforceable contract. The impact of these limitation endorsements is discussed later in these pages.)

Lease of Premises

Real estate leases are the contracts that create the relationship between the landlord (lessor) and the tenant (lessee). At a minimum, these contracts specify the premises or part thereof that is subject to the lease, the term of the lease, and the consideration. It is not uncommon to see leases that are silent insofar as any hold harmless clauses. Generally, landlords want to be held harmless and defended whenever they are drawn into a claim or suit because of some act or omission of the tenant. This is not to say that leases are this generous toward tenants, because they can include agreements whereby the tenant is required to assume the financial consequences of a landlord's acts or omissions that lead to third party injury or damage. Unless there is some applicable anti-indemnity statute that addresses these kinds of broad contractual assumptions, contractual liability coverage can encompass them.

What can be somewhat confusing about lease of premises is reference to personal injury instead of bodily injury. Attorneys commonly use personal injury instead of realizing, as they should, that bodily injury is the proper term to use with reference to lease of premises and contractual agreements. In other words, bodily injury refers to physical bodily harm, whereas personal injury, in insurance parlance, refers to certain intentional torts, such as libel and slander.

Since lease of premises is considered to be an insured contract, the liability for bodily injury or property damage that a tenant assumes under contract or agreement is considered to be covered by the tenant's CGL policy, unless the nature of the assumption is otherwise precluded by law. In any case, however, contractual liability under an insured contract does not encompass any agreement by the tenant to indemnify a landlord for fire damage to rented or leased premises. As such, if the only reason the tenant may be liable for fire damage to the landlord's property is because that liability was assumed by contract, no coverage applies. Conversely, if the tenant is liable for such damage to that part of the property not rented to or temporarily occupied by the named insured tenant, whether or not such liability was assumed by contract, coverage would apply. This coverage under a standard ISO CGL policy generally applies excess over other more specific coverage, but in the absence of such other insurance, the CGL policy applies as primary. For property in the tenant's care, custody or control, it is advisable to consider the purchase of fire legal liability insurance (termed in the CGL as Damage to Premises Rented to You).

Easement or License Agreement

It is probably a good idea that both easement and license agreements are combined in this subpart of the "insured contract" definition, because there are some differences between the two and they are sometimes difficult to distinguish. In a typical easement agreement, a property owner gives some person or entity permission to come upon the property owner's land for a specific purpose. An example is when an owner of land who has the only driveway that provides access to parking in the rear gives an easement to an adjoining business to use that same driveway. In this case, the owner of land may require a contractual agreement from the adjoining business owner holding the owner harmless for any bodily injury or property damage to third parties caused by the business owner who has been granted an easement. An example of a license agreement is where a person is given permission to use another's business premises to exhibit its products and services for limited time, such as at a convention.

Not within the scope of an insured contract is an easement or license having to do with construction or demolition operations on or within 50 feet of any railroad property. This is an important exception that is discussed in relation to the subject of railroad protective liability.

An Obligation Required by a Municipality

Cities, towns, villages, and townships usually have ordinances that require others to indemnify them for any liability causing injury or damage because of devices that may pose a hazard to members of the public. An example is the storeowner who requires the installation of a sidewalk elevator or who wants to have window awnings installed. A condition precedent to the installation of these devices usually is an agreement requiring the building owner to be answerable for any injury or damage stemming from the use or operation of those and other devices.

If what is to be done is some construction work on municipal property, and a hold harmless agreement is required to be executed between the contractor and the municipality, that contract would not fall within this subpart of the insured contract definition. It, instead, would be subject to the tort liability contracts category of the insured contract definition.

Sidetrack Agreement

It has long been understood that when businesses desire to use railroad property for the implementation of spur tracks or sidetracks to better facilitate the shipment and receipt of their cargo, and the railroad is willing to lay the tracks necessary to meet these needs, the contracts involved will be in favor of the railroads.

The primary concern of loss with sidetracks in the earlier years was by fire from coal-fired locomotives. It was no small wonder then that contracts drafted during that period placed the burden upon the businesses to assume loss to the extent of fire damage from locomotives, whether or not the loss arose from the railroad's sole negligence. While the peril of fire was the primary concern in that era, businesses also were required to hold harmless and indemnify the railroads for loss, damage or injury from acts or omissions of the businesses, their employees or agents, along with the persons and property of others while on or about the tracks.

Coverage for liability assumed for railroad spur tracks or sidetrack agreements has been provided automatically since at least 1941 when standard liability forms were first introduced. It did not matter then (or now) what the contract required in terms of the extent to which liability was assumed or what property was damaged and its causes of loss.

An exposure that appears to have taken on greater significance in relation to railroads and can adversely impact upon businesses utilizing sidetrack agreements is the Federal Employers Liability Act (FELA). Enacted by Congress in 1908, before state workers compensation laws were passed. FELA creates a cause of action by employees or their families against the negligence of railroads operating in interstate commerce. Considering that claims of railroad employee-related injuries can occur on or about sidetracks, with substantial injury awards, what needs to be considered is the extent to which a business using a sidetrack may be responsible for having to indemnify the railroad for such injuries.

This, in fact, was one of the questions that confronted the court in the case of Grand Truck Western Railroad, Inc. v. Auto Warehousing Company, 686 N.W.2d 756 (Ct. App. Mich. 2004), which involved a railroad employee's injury on a sidetrack and where the ultimate damages under FELA had to be paid by the business whose premises was served with a sidetrack.

The employee in question, a brakeman/conductor, was first injured in an accident while coupling railcars. That accident was found not to be subject to indemnity under FELA. A year later, this same employee was injured a second time and determined to be permanently disabled when he slipped and fell after encountering a problem with snow-covered rail switches on sidetrack property leased to an auto warehousing company.

The sidetrack agreement contained two clauses involving indemnity. The first required the auto warehouse (lessee) to keep the premises free from hazards, such as ice and snow, and to indemnify the railroad (lessor) for any claims arising from its failure to do so. The second clause required the auto warehouse to indemnify, defend and hold harmless the railroad from any claims arising from personal injuries, unless caused by the sole negligence of the railroad, its agents or employees.

One of the interesting comments of the court in this case was that these contractual agreements of railroads were made in contemplation of liability under FELA. According to the court's rationale, these agreements provide for indemnification of the railroad when the lessee's conduct is said to violate the railroad's non-delegable duty to furnish a safe workplace. What is especially significant here is the generally recognized principle that a railroad under FELA may be liable for its failure to provide a safe workplace, even where the employee's injury occurs on premises that are neither owned nor controlled by the railroad!

Under the railroad sidetrack agreement of this case, the auto warehouse agreed to keep the premises free from hazards, obstructions, ice and snow, debris, inflammable, explosive and combustible materials. As to indemnity, the auto warehouse acknowledged that it was obtaining not only unique advantages, but also some risks that the premises might be damaged by train operations, maintenance operations and/or derailments. The auto warehouse also agreed to indemnify, defend and hold harmless the railroad from and against claims arising from any injury to, or death of any person (including employees of either party) being on the premises, caused by or in connection with such premises, unless caused by the sole negligence of the railroad.

The problem here was that for an employee under FELA to obtain an award from his or her employer, the employee would have had to allege employer sole negligence. Unless the contractual liability agreement included the assumption of the railroad's sole negligence, however, the business owner's CGL insurer would probably have denied the railroad defense and indemnity, just as was the result in the above case. If, however, it could be shown that the business was at least one percent at fault, the tides would likely have turned in this matter and the insurer would likely have had to provide coverage. In the final analysis, the users of railroad sidetracks are likely going to have to pay damages, if any injury would not have occurred but for the sidetrack users' negligence.

Elevator Maintenance Agreement

An elevator maintenance agreement is not likely to have much to it in terms of assumed liability for injury or damage. Generally speaking, elevator companies are somewhat stingy when it comes to the coverage they promise building owners or lessees. In terms of contractual liability, an elevator company will usually provide a hold harmless agreement limited solely to its own fault which, as discussed later, is not anything of significance.

While on this subject, it may be of interest to know that when it comes to installing elevators or performing major work on existing elevators, the elevator company is not likely to provide additional insured coverage. If push gets to shove, they usually will provide an Owners and Contractors Protective Liability (OCP) policy covering the building owner or lessee for its vicarious liability, i.e., liability imputed to it because of the acts or omissions of the elevator company, and only while operations are in progress.

One might wonder how escalator maintenance agreements are handled by liability coverage, given that an escalator is different from an elevator. If such an agreement were to involve the assumption of tort liability, then coverage would be subject to subpart f. of the insured contract definition. In other words, the building owner or lessee who signs an escalator maintenance agreement holding harmless the escalator company for any liability of the latter would be charged for contractual liability coverage, if the assumption is otherwise enforceable by state law. Conversely, if the liability assumed is limited solely to the escalator company's fault, any liability alleged against the building owner or lessee stemming from an escalator incident would fall under the premises-operations coverage, since it would be considered liability that would apply even in the absence of contract.

Tort Liability Contractual Assumptions

If there is any confusion having to do with contractual liability coverage, it is with the contracts subject to subpart f. of the insured contract definition. This subpart f. deals with any other contract or agreement (other than the preceding ones in subparts a. through e.) where the named insured (indemnitor) assumes the tort liability of another party (indemnitee) to pay for damages because of bodily injury or property damage to a third person or organization. The policy defines "tort liability" as meaning "a liability that would be imposed by law in the absence of any contract or agreement". An example is negligence; that is, the failure of the indemnitee to exercise the proper degree of care required by the circumstances.

One of the reasons for the definition of tort liability is an attempt to clarify the kinds of contracts not considered to be contractual for purposes of contractual liability coverage. For example, any warranty of the fitness or quality of the named insured's products or warranty that work will be performed by or on behalf of the named insured will be done in a workmanlike manner are considered to be contractual assumptions of liability, whether expressed or implied.

During pre-1986 policy editions, both the definition of contractual liability and the exclusion of contractual liability specifically referred to these warranties of products and work as not being considered the kind of contracts considered to be covered by contractual liability coverage. Unfortunately for some insurers, these exceptions to the exclusion generated a great deal of litigation and some courts held that, because of these exceptions, coverage applied for breach of warranty claims involving products and completed work, even when the products-completed operations hazard was excluded.

This is important background information, because it should help in understanding the rationale for the reference to tort liability in relation to contractual liability coverage. Given the common misunderstanding over the exception to breach of warranties involving products and work in relation to contractual liability coverage, it was decided that if contractual liability coverage provisions were to simply refer to tort liability with an accompanying definition, it would not be necessary to refer to these warranties. So, this is what occurred with the introduction of the 1986 CGL policy provisions. No reference is made to these warranties within the contractual liability exclusion or within the definition of insured contract. These warranties, instead, are mentioned with reference to the products-completed operations hazard.

Another example of a situation that is not considered to be tort liability assumed is a roofing subcontractor hired to lay a new roof on an educational institution. The roofing subcontractor agrees in the contract to hold harmless and indemnify the general contractor. Following completion, the roof is found to be defective. Nothing was damaged, except the subcontractor's work. As a result, the general contractor is sued by the educational institution for failing to have the roofing done properly as promised, and the general contractor, in turn, looks to the roofing subcontractor for protection based on the contractual assumption. This is not an insured contract, because the allegation is based on breach of contract, rather than tort or civil wrong, such as negligence.

There also is the argument that contract provisions requiring one party to perform specified obligations are considered to be assumptions by that party of any tort liability that arises out of any breach of the obligation to perform. In essence, however, this would transform every contract into an insured contract, since all contracts obligate one or more parties to perform, and every breach of a contractual obligation that results in tort liability would trigger contractual liability coverage. This position, taken by at least one insurer, contradicts industry practice, which equates assumptions of another's tort liability with the assumption of liability in an indemnity agreement. This also contradicts the position taken by the insurance industry, generally, to the effect that there can be no coverage for liability arising out of a contract, a premise ultimately discredited by the case of Vandenberg v. Superior Court of Sacramento County (CA), 88 Cal. Rptr.2d 366 (1999).

In this decision, the California Supreme Court disavowed the argument that the phrase "legally obligated to pay as damages", found in insuring agreements of liability policies since 1955, describes liability based on breach of duty imposed by law, i.e., tort, but not by contract. The court instead confirmed that the above referenced phrase can encompass tort liability, even in situations involving contract in many instances. (Note that in this case, the breach of contract was claimed to have caused property damage.)

In summary, at the risk of over-simplification, tort obligations are imposed by law. If an indemnitee's conduct, such as negligently causing a premises hazard that results in an invitee's injury, gives rise to liability independent of the fact that a contract existed between the indemnitee and indemnitor, the claim would be in tort, i.e., a civil wrong. On the other hand, if the indemnitee's conduct only gives rise to liability because of its failure to comply with some promise, the claim for damages would be for contract, not tort, and therefore not subject to coverage under subpart f. of the insured contact definition.

Mutual or Reciprocal Agreements: Involve Tort Liability or Not?

The fact that reference is made in subpart f. of the insured contract definition to tort liability, along with a definition of that term does not necessarily clear up all questions about what tort liability entails. An example of where there still is a difference of opinion is with what is referred to as mutual or reciprocal contracts. This is where each party agrees to hold harmless, defend and indemnify (or some combination thereof) the other party from any claims, damages, liability, costs, etc., that each party causes the other arising out of injury or damage to a third party. In other words, A (indemnitee) agrees to be responsible for its fault and B (indemnitor) agrees to be responsible for its fault.

A mutual or reciprocal agreement is not uncommon. In fact, it is very popular and common within the construction industry. The indemnification agreement of the American Institute of Architects General Conditions A 201, 2007 edition, which is widely used by project owners is an example. This section of that contract states that the contractor shall indemnify and hold harmless the owner and others against claims, damages, etc., arising out of or resulting from the performance of the work, subject to two conditions. The first is that liability for damages, etc., is attributable to bodily injury or property damage. The second condition is that such liability of the contractor applies only to the extent caused by the negligent acts or omissions of the contractor, a subcontractor, or anyone employed by them or for whose acts they may be liable, regardless of whether such claim, damages, etc., is caused in part by the party indemnified. In other words, this indemnification agreement does not apply to any liability for acts or omissions of the owner, i.e., the party indemnified.

However, does a mutual or reciprocal agreement meet the definition of an "insured contract" under subpart f. of the definition? The answer depends on the facts. If each party agrees to indemnify the other party solely for liability attributable to its own proportionate percentage of fault, then neither party has assumed any tort liability, so in this case a mutual or reciprocal agreement would not meet the definition of an "insured contract" under subpart f.

However, a mutual or reciprocal agreement can qualify as tort liability under an insured contract where the indemnitor has also assumed the indemnitee's vicarious liability. Consider for example, a situation where the contract has an indemnity agreement stating that each party has agreed to be responsible for its own negligence. Even though a claim is attributable to the negligence of the indemnitor, the other (innocent) contracting party (indemnitee) may nonetheless be held to be vicariously liable for the other party's (indemnitor's) culpable negligence. (Vicarious liability, in essence, means liability imputed to a person or organization because of the conduct of another, based solely on the relationship between the two parties.) Thus, despite the fact that the contracting parties have agreed to be responsible only for their own negligence, there is still an insured contract, because responsibility for one's own negligence would include responsibility for the vicarious liability of the other contracting party, depending how the contract is worded. To repeat, however, if one or both parties are agreeing to be liable for only their own respective conduct, and nothing more, and only one side is found to be negligent, there should be no insured contract.

The Meaning of Tort Liability

Apart from the mutual or reciprocal agreement, having identified some of the common indemnification agreements that are not considered to be an insured contract because they fail to include the tort liability assumptions of indemnitees, it is now appropriate to discuss some situations that are considered to be insured contracts involving tort liability.

The first scenario involves a tenant of a commercial building who agrees to indemnify the landlord for any liability arising out of the tenant's use of the subject property. Under this wording, the tenant has agreed to assume any liability, including the tort liability of the landlord, with the only caveat being that the liability must have some connection to the tenant's use of the property. Therefore, even where the landlord is fully or partially at fault, the tenant still could be said to have assumed the landlord's liability, if the conduct of the landlord leading up to such liability has some connection to the tenant's use of the premises. This, of course, assumes it is an enforceable contract under the law of the state involved.

It is important to point out here that tort liability is not solely a necessary condition of subpart f. of the insured contract definition. In other words, all of the contracts within subparts a. through e. can involve tort liability, too, but unlike subpart f., tort liability is not a requirement.

Let's assume for example, that a manufacturer's premises is divided by railroad tracks. To reach the business premises, the manufacturer obtains an easement from the railroad. In doing so, the railroad requires a hold harmless agreement which includes the stipulation that the manufacturer will be held responsible for all injury or damage arising from the use of the easement. After a trucker leaves the manufacturer's premises and is crossing the tracks, it is struck broad-side by a locomotive, which not only results in damage to the locomotive but also causes a derailment of several box cars. If the railroad seeks payment for its damages, they should be covered in light of the easement agreement, despite the lack of any tort liability allegation. Subpart f. of the insured contract definition, in fact, does not even apply, since the event clearly falls within an easement. This is not to say, however, that subpart f. of the insured contract definition is the only way to obtain tort liability coverage, since it can apply also to any one of the subparts a. through e.

Another example involving tort liability is the subcontractor who agrees to hold harmless and indemnify the general contractor from any claim, damage, loss or expense that is caused in whole or in part by any negligent act or omission of the subcontractor and regardless of whether the claim, damage, etc. is caused in part by the general contractor. Assume further than an employee of the subcontractor is injured on the job and it turns out that both the subcontractor and general contractor are partially to blame for the injuries. In this case, the subcontractor assumed the tort liability of the general contractor and there was injury to a third party (an employee of the subcontractor). Because this indemnification agreement encompassed the partial fault of the general contractor, and the subcontractor also was partially at fault, the damages are considered to be the result of an insured contract and, therefore, covered by the policy. This assumes, of course, that any state anti-indemnity statute does not hold these kinds of contracts to be void and unenforceable.

 What "Insured Contract" Does Not Include

Next we will identify three situations that do not fall within the meaning of subpart f. of the insured contract definition. 

In those situations where construction or demolition operations are being performed within 50 feet of any railroad property and affecting any railroad bridge or trestle, tracks, road-beds, tunnel, underpass or crossing, the railroad is going to require an indemnity agreement. When required by the railroad, the named insured is going to have to purchase a Railroad Protective Liability policy, because this exposure is specifically precluded as an insured contract.

The second and third situations that are not considered to be insured contracts are both aimed at eliminating contractual liability coverage for injury or damage resulting from professional errors or omissions of architects, engineers, or surveyors. The first such clause excludes coverage when the insured (who may or may not be an architect, engineer, or surveyor) agrees to indemnify an architect, engineer, or surveyor for injury or damage arising out of the itemized services, such as preparing, approving or failure to prepare or approve maps, shop drawings, opinions, reports, surveys, field orders, change orders or drawings or specifications. The second clause excludes coverage when the insured is an architect, engineer, or surveyor and assumes liability for injury or damage arising out of its rendering or failure to render professional services for others, including the itemized services. (Not within the definition of an insured contract, however, under subpart f. is that part of any contract where (1) the named insured assumes the partial or sole fault of an architect, engineer, or surveyor, or (2) when the named insured is an architect, engineer, or surveyor and assumes the partial or sole fault of some other party.)

To expand on this subject, assume a CGL policy is issued to an architect, engineer, or surveyor and no professional services exclusion applies. This means that the CGL policy covers liability stemming from the rendering of, or failure to render, professional services, but only to the extent of bodily injury, property damage, and personal and advertising injury liability. If any of these professionals were to agree to hold harmless, defend and indemnify a project owner for bodily injury or property damage arising solely out of the professional's work, coverage should still apply. The reason is that this kind of contractual assumption would apply even in the absence of such contract or agreement. To clarify, what would not be covered if a CGL policy were not endorsed with a professional liability exclusion, are the economic damages that result from a professional's rendering or failure to render a professional service; i.e., an error that results in additional costs being incurred. If the error were to cause property damage, however, this would be covered, if the policy does not otherwise exclude damages because of property damage.

When, however, the named insured under a CGL policy is an architect, engineer, or surveyor who agrees to hold harmless, defend and indemnify another party to the agreement because of the professional's sole fault, the professional's CGL policy continues to apply. The reason is that the agreement is not an insured contract, and the professional's liability for its own negligence, would exist even in the absence of any contract or agreement.

When a Contract Must Be Executed

The last of the contractual liability coverage mechanics discussed here has to do with when a contract must be executed. The answer is found in the wording of the second exception to exclusion b., contractual liability: "… provided the bodily injury or property damage occurs subsequent to the execution of the contract or agreement"; in other words, before any bodily injury or property damage occurs.

(There is a probable rationale for the phrase in the contractual liability exclusion requiring that bodily injury or property damage occur subsequent to the execution of a contract or agreement. It is to clarify that no protection is to be provided after injury or damage takes place in a circumstance where there has been no expressed or implied meeting of the minds between the parties before an accident, and the only reason for the post-loss signing of an agreement is to transfer the consequences to an insurer. This motive is fraudulent and presents public policy issues.)

It is common for two parties to a contract to commence their respective performance even before a written contract has been signed, particularly among owners of property or construction projects who often require the prompt services of contractors before the contract can be formalized by signing. In many instances, the parties involved have contracted with one another in the past, have faith in one another, and each knows (or should know) what the respective obligations are likely to be. Even if the parties to the contract have not contracted with one another in the past, there is often some oral agreement or implied understanding as to contract terms. In any event, with time of the essence, project owners often permit the commencement of work even though the contract has not been signed and despite the fact that an executed contract may be viewed as a condition precedent to commencing work under the terms of many primary liability policies.

Now, accidents sometimes arise while contractual obligations, work, or services are being performed, and if questions arise regarding the timing of the contract's execution, it will come from others, including insurers, in situations involving an indemnitor and indemnitee relationship. From the perspective of the indemnitee and indemnitor, the contract will likely be deemed to have been executed or made before an accident even though not actually signed until after the accident, because each party has likely given up consideration, which can include performance. The project owner (indemnitee) may have made a partial payment or the promise thereof, and the contractor (indemnitor) may have begun to perform his or her services.

Whether the contractual liability coverage is restricted to written contracts or encompasses oral and written contracts, the task of the insurer wanting to deny protection based on failure to execute a contract before injury or damage is likely to be difficult and complex. The reason is that the undefined word 'execution', as it appears in the CGL policy provisions, does not necessarily mean signed; an "executed contract" can be said to be one which is fully performed, or one that has been signed. All others are executory contracts. However, the words, 'executed' or 'made', as used in the CGL policy provisions, are not defined nor do they make a distinction between a fully executed contract and an executory contract where some act, such as the signing, remains to be done.

Black's Law Dictionary, 6th Edition, 1990 defines the term "executed" as: completed; carried into full effect; already done or performed; signed; taking effect immediately; now in existence or possession; conveying an immediate right of possession; act or course of conduct carried to completion; term imports idea that nothing remains to be done. This same legal treatise defines the term "execution" as: carrying out some act or cause of conduct to its completion. So, while it might be argued that the term "execution" means completion of the work required by the contract rather than just its signing, legal definitions make it appear that only the completion of the act necessary to render the contract a complete instrument is required by the term 'executed' or 'made', as used in the ISO CGL policy provisions. However, at best, those terms remain ambiguous, as they pertain to the requirement of actual signing, as opposed to conduct equivalent to a signing.

This may be the reason that, of the number of cases involving this matter that have gone before the courts, the consensus is that most still hold for coverage, despite the fact that contracts were unsigned at the time of injury or damage. For example, in the case of Travelers Insurance Company v. Chicago Bridge & Iron Company, 442 S.W.2d 888 (1969), the court did not require a signing to constitute execution of a written contract. Here, the court held that execution of a contract included performance of all acts necessary to render the contract complete as an instrument, and that the term imparted the idea that nothing remained to be done to make a complete and effective contract. Under this reasoning, the contract was arguably executed, as long as the contract was written and performance was underway or complete.

Of significance in the above Travelers case was the court's reproduction of the following wording taken from Corbin on Contracts: if a written draft of an agreement is prepared, submitted to both parties, and each of them expresses his unconditional assent thereto, there is a written contract. Sofar as common law is concerned, the making of a valid contract requires no writing whatsoever; and even if there is a writing, there must be no signatures unless the parties have made them necessary at the time they express their assent and as a condition modifying that assent. An unsigned agreement, all the terms of which are embodied in a writing, unconditionally assented to by both parties, is a written contract.

In at least some jurisdictions, the party's assent to the contract, arguably, is sufficient to execute an agreement that is being performed or where performance is complete or nearly complete. A case on point is Smith v. AJ Contracting Company, Inc., 716 N.Y.S.2d 77 (Sup. Ct. App. Div., 2d Dept., 2000), where the contract for the performance of work was not signed until close to two-thirds of the work on the project was completed, and where payment for the work had been requested. Another case upholding coverage is Mid-Continent Casualty Company v. Global Enercom Management, Inc., 293 S.W.3d 322 (2010). Although not signed by Global until after the accident, the subcontract was nonetheless considered by the court to be "executed" before the accident. The reasons, according to the appeals court, were that there was no language in the policies requiring both parties to sign the insured contract, and there was no evidence raising a fact issue of the parties' intent to require that all parties to the subcontract sign it as a condition precedent to the subcontract's validity. (Note that this decision was affirmed in part by the Texas Supreme Court in Mid-Continent Casualty Company v. Global Enercom Management, Inc., 323 S.W.3d 151 [2010]; the affirmation dealt with the "executed" contract part of the opinion.)

The fact that some cases such as these have held for coverage does not mean that this issue is a slam-dunk one against insurers, since there are cases holding against coverage.

An older case (that has not been overruled) is Lynch v. Figge, 192 N.Y.S. 873 (1922), where a New York appeals court said that the word "executed" is synonymous with the word "signed", and this is not open to question; "executed" means "signed", as used in statutes and decisions.

Other case examples are Doty Brothers Equipment Company v. Palp, Inc., 2010 WL 3623642 (Ct. App., Second Dist., Div.4, Cal.) and George Temmel v. 1515 Broadway Associates, L.P., 795 N.Y.S.2d 234 (2005).  A third case is Suffolk Construction Company v. Illinois Union Insurance Company, 951 N.E.2d 944 (2011), where the Appeals Court of Massachusetts, Suffolk, after researching case law and legal writings, concluded that the word "execute" in reference to a contract means that the contract must be signed in order to be in force.

Therefore, whether the insured or insurer will win its argument is a judicial determination that can vary by jurisdiction and should not be left for chance. Depending on the parties' respective interests, it is preferable for the contract, whether written or oral, to be considered executed at the time performance begins. So, with oral contracts, this condition should be clearly understood between the parties, and a clause to that effect inserted in written contracts. Obviously, this must be in conformity with the applicable law, if any, of the state involved.