Pondering the use of a "savings clause"

Is the prescribed contract permitted by law? 

Indemnitor indemnification – 50 state survey

What does the unendorsed CGL policy provide? 

Defense and coverage for legal costs

Introduction

We find it's safe to say that virtually all standard ISO CGL policies, and many independently filed ones, include some form of contractual liability coverage today. This isn't to say that such a policy includes all six types of insured contracts (as listed in the ISO CGL coverage form's definition of insured contract). In some cases, standard policies (as opposed to those issued in the excess and surplus lines market) are used subject solely to the first five insured contracts (as defined in the CGL form), leaving out the important coverage for tort liability assumed. In fact, for the two-year window of 1986 to 1988, standard CGL policies unquestionably included coverage for tort liability assumed. In fact, the 1986 CGL policy was heralded as automatically including broad form blanket contractual liability, thus eliminating the need to purchase that coverage, as was the case with pre-1986 CGL forms, either by separate endorsement or in conjunction with the broad form comprehensive general liability coverage endorsement. In 1988, ISO introduced the contractual liability limitation endorsement, CG 21 39, which gave insurers the opportunity to reduce contractual liability coverage by eliminating coverage for tort liability assumed. This endorsement also created some problems, because it disrupts the way policies were read, along with the systematic way in which contractual liability coverage was determined.

Determining the scope of coverage under a standard CGL policy in 1986 involved a two-step process: First, what does the indemnification agreement of a contract prescribe; in other words, what is the nature of the contractual assumption that is being required by the indemnitee? Second, what, if any, anti-indemnity statute applies, and is the kind of contract being prescribed otherwise valid and enforceable? So, for example, if a contract required contributory negligence and the applicable anti-indemnity statute permitted such assumptions, the CGL policy would automatically cover the indemnitor (named insured) and the indemnitee (additional insured or not) to the extent of any bodily injury or property damage not otherwise excluded up to the policy limit.

In other words, the CGL policy was constructed in such a way that it would automatically cover contractual liability for the sole or partial fault of the indemnitee, or sole fault of the indemnitor and vicarious liability of the indemnitee, so long as these contracts were valid and enforceable by state law, and to the extent any such law existed.

When ISO introduced CG 21 39 in 1988, a three-step process was created. The third step involves the question: what coverage does the CGL policy provide? It is no longer a simple matter of relying on the CGL policy for coverage of an otherwise valid and enforceable contractual assumption. What also needs to be done is to check the CGL policy to see if any applicable limitation endorsement applies. (The other such limiting endorsement, which is less narrow than endorsement CG 21 39, is the amendment of insured contract definition, CG 24 26, which was introduced by ISO in 2004.)

To determine the extent to which an otherwise valid contract is covered today entails:

(1) the exploration of the varying degrees of contracts involving the assumption of the financial consequences of liability;

(2) an in depth look into applicable anti-indemnity statutes, to the extent they exist and their purpose; and

(3) what contractual liability the CGL policy provides.

Also important is the impact of contractual liability coverage that is more limited than what contractual assumptions are permitted in a given situation, and the matter of how defense costs are handled. Each of these subjects is addressed here.

What Does the Contract Prescribe?

The first step in determining the nature of the required contractual liability coverage is to identify, from the contract, what the indemnitee is seeking from the standpoint of protection from the indemnitor.

Traditionally, at least from the perspective of insurers providing contractual liability insurance, hold harmless agreements have been categorized into three classes: limited, intermediate, and broad form. Note that since the limited form can also include vicarious tort liability, this kind of contract is added as a fourth class for purposes of this discussion.

Limited Contracts. These are contracts that involve common law indemnity. In other words, the indemnitor agrees to hold harmless and indemnify the indemnitee for acts or omissions that are solely those of the indemnitor. For example, A states to B that if B is sued for damages arising out of A's negligent acts, A will protect (or hold harmless, assume responsibility for, or indemnify) B. The American Institute of Architects (2017 edition), along with the Engineer Joint Contract Documents Committee, ConsensusDOCS, and the Design-Build Institute impose a limited form contract. It is interesting to note that indemnitees apparently either do not understand or do not pay attention to what they are requiring when the provisions amount to a limited contract. The reason for this comment is that there is considerable litigation among indemnitees who maintain that when a claim is made against them alleging partial or sole fault, they are quick to dispute this conclusion and maintain that as indemitees, they should be protected by the indemnitors' insurers.

As some indemnitees have learned, limited contracts are viewed in the insurance industry as not being in the realm of contractual liability, because the liability would apply even in the absence of a contract or agreement. It is conduct, in other words, that is implied. Coverage for limited contracts falls under the premises-operations hazard of a CGL policy, except when such a contract is considered to be a lease of premises, easement or license agreement, agreement required by a municipality exception for construction work, a sidetrack agreement or elevator maintenance agreement. In these latter instances, the limited contract is viewed in the category of an "insured contract".

Vicarious Tort Liability. A mutual or reciprocal agreement, which is a limited contract, can still involve tort liability where the indemnitor not only assumes the result of its own acts or omissions, but also assumes indemnitee's vicarious liability. Recall that vicarious liability, in essence, means liability imputed to the indemnitee because of the conduct of the indemnitor, based solely on the relationship between the two parties. For example, A agrees to protect B against liability arising from A's negligent acts, and liability that attaches to B because of A's acts or omissions.

Therefore, 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 could also include responsibility for the vicarious liability of the other contracting party, depending how the contract is worded. In these cases where an indemnitor also assumes the financial consequences of the indemnitee's vicarious liability, the situation is referred to here as a vicarious tort liability, but viewed as a limited contract because the vicarious liability is passive in nature. 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. (This kind is also referred to as a "knock-for-knock" contract.)

Intermediate Contracts. These are contracts where the indemnitor agrees to hold harmless and indemnify the indemnitee for the indemnitor's sole negligence and the partial fault of the indemnitee. This could involve, for example, 99 percent of fault on the indemnitor and 1 percent on the indemnitee, or 49 percent fault on the indemnitor and 51percent on the indemnitee. A condition precedent to one of these contracts is some fault being placed on the indemnitor. For example, A agrees to protect B against liability arising out of A's negligent acts, and to share responsibility if both A's and B's negligent acts result in injury or damage. Another example is when A assumes all responsibility for concurrent negligence regardless of fault. Here, A states that it will accept all responsibility (including damage arising from the negligence of both parties), except for negligent acts committed by B alone.

These are common types of contractual agreements. In fact, the 2004 edition of the ISO additional insured endorsement for owners, lessees or contractor, CG 20 10, is intended to cover additional insureds to the extent injury or damage is caused in whole or in part by the named insured. Despite this kind of contract (and additional insured endorsement) being readily acceptable in many states, there are others states that will simply not accept this kind of assumption, as will be mentioned in more detail later.

Broad Form Contracts. These are contracts where the indemnitor agrees to hold harmless and indemnify the indemnitee for its sole fault. For example, A agrees to accept all responsibility for liability, including the sole acts of B's negligence. Most states prohibit these contracts, although some states will permit them, if insurance is in place so that the indemnitor is not the one who is required to pay for the financial consequences of the indemitee's sole fault assumed.

 Pondering the Use of a "Savings Clause"

Many project owners and other indemnitors will rely on the hold harmless agreements of the American Institute of Architects or some other organizations. Others will rely on attorneys to draft their agreements. Whatever the case may be, many indemnification agreements include a "savings clause" as a precautionary measure. A typical savings clause appears at the beginning of an indemnity agreement and states: "To the fullest extent permitted by law . . . ." This wording is used to avoid having a contract considered void and unenforceable because it required a kind of indemnity provision that exceeded what was permitted by law. In some states, for example, it is permissible to require indemnity for one's own sole fault, as long as that intent is expressed clearly in the contract and agreed to by the party assuming the obligation. In many other states, however, sole fault is not allowed.

Since many contracts are used by large firms throughout the United States, the savings clause allows indemnity to the full extent permitted by law without requiring the indemnity provision to be altered to specifically comply with the varying laws of each state in which the indemnity provision is used. Absent such a provision, a contract requiring sole fault or contributory negligence indemnification might be considered unenforceable. The savings clause is one of the tools which can ensure that an indemnity obligation does not run afoul of the applicable law in a given state.

(The term "savings clause" also is used to refer to a contract provision, such as in leases, stating that, in the event one section of a contract is deemed to be unenforceable, this does not affect the enforceability of the other contract provisions.)

One of the few cases dealing almost exclusively with a savings clause is Bush v. The City of New York, et al., 762 N.Y.S.2d 775 (Sup.Ct., 2003), which involved injury to an employee of a general contractor hired by the State of New York, while using a rented manlift. The employee commenced this action against both New York and the rental firm, claiming that the manlift malfunctioned because of negligent maintenance and repair. The rental company, in turn, commenced a third party action against the general contractor seeking contractual and common law indemnification and contribution. (The rental company also alleged a breach of contract claim against the general contractor for its alleged failure to procure insurance to cover this action and to name the rental company as an additional insured.)

After denial of its motion, the rental company sought to reargue the issue. It asserted that the court overlooked its argument that the indemnification agreement was removed from the prospective ambit of General Obligation Law, Section 5-322.1 (hereinafter the N.Y. statute), which held sole fault of the indemnitee to be void and unenforceable. The rental company's rationale was based on the inclusion of the qualifying provision in the agreement seeking indemnification "to the fullest extent permitted by law".

Faced with the unresolved issue of fact whether the rental company (indemnitee) was negligent in any way in the handling of the manlift that caused injury to the general contractor's employee, the court was unable to determine whether the subject indemnification agreement violated the N.Y. law. In considering the interplay between the contractual indemnification and the N.Y. law, the court first looked to the case of Itri Brick v. Aetna, 658 N.Y.S.2d 903 (1977), where the court construed the New York statute as voiding indemnification agreements that contemplated full indemnification. The court held in the Itri Brick case that the N.Y. statute made no attempt to salvage that part of the indemnification agreement that would require a subcontractor to indemnify a general contractor for the subcontractor's negligence only.

Since the Itri Brick case was said not to have specifically grappled with the issue of the language needed to remove an indemnity agreement from the proscriptive ambit of the N.Y. law, the court next looked to the case of Dutton v. Charles Pankow Builders, 745 N.Y.S. 2d 520 (2002), which recognized the principle of partial indemnification. In this case, the indemnification clause provided that: "To the fullest extent permitted by applicable law, the subcontractor will indemnify the general contractor for all liabilities arising out of personal injuries sustained in connection with the subcontractor's work regardless of whether [the general contractor is] partially negligent … excluding only liability created by the [general contractor's] sole and exclusive negligence."

Focusing on the phrases limiting the subcontractor's obligation to that permitted by law and excluding liability created by the general contractor's sole and exclusive negligence, the court ruled that the above provision was valid, because it permitted partial, not full indemnification of the general contractor for personal injuries partially caused by its negligence. (The rental company in the Bush case was said to have acknowledged that the language in the indemnification purported to hold it harmless for its own negligence.) In acknowledging this, the court felt that the rental company was subject to the Itri Brick "prophylactic rule" of rendering such agreements unenforceable by the negligent indemnitee. The rental company argued, however, that the qualifying phrase in the agreement saved such a contract provision that otherwise exceeded the permissible limits of the Itri Brick case.

Two trial level decisions referred to by the court in the Bush case, which met that issue head-on came to opposite conclusions. In Bright v. Tishman Construction Corp. of New York, 1998 WL 63403 (S.D.N.Y.), the contract, while containing language requiring full indemnification of the general contractor's negligence, found the general contract to be contributorily negligent. The court held that such an unlimited indemnification clause was void in its entirety, despite the qualifying phraseology "to the fullest extent permitted by law". Conversely, in the unreported decision of Bray v. C&D Fireproof (Sup. Ct. Rockland County, Index No. 1225/94, 1997), the court held that a full indemnification agreement that contained the qualifying phraseology, did not purport to indemnify the indemnitee against its sole negligence and, thus, it removed the agreement from the "proscriptive ambit" of the N.Y. statute. Although the court in the Bush case stated that it was not obligated to follow either of the Bright or Bray cases, it was persuaded that the Bray decision provided the correct reading of the N.Y. statute. The court therefore held that an indemnification agreement containing the savings clause "to the fullest extent permitted by law" removed the indemnification agreement from the ambit of General Obligations Law, Sec. 5-322.1.

It may not have been the Bush case that motivates some drafters of indemnification agreements and other contracts to insert a savings clause, but its use has grown in popularity. It, in fact, prefaces the indemnification agreement contained in the American Institute of Architects General Conditions A201 Forms, 1997 and 2007 editions. The insertion of this phrase does not hurt and, in fact, could salvage the remaining contract in the event of a dispute.

Is the Prescribed Contract Permitted By Law?

After determining the nature and scope of the indemnification agreement prescribed in the contract, the next step is to determine whether the hold harmless provision is subject to any state law. If it is void and unenforceable, that is the end of the matter insofar as contractual liability insurance will be concerned. With a savings clause, however, the indemnification agreement may be salvageable. Also, a state law may be subject to certain exceptions having to do with indemnification agreements. For these reasons, one needs to obtain the actual law itself to see specifically what these laws are and what they are intended to do, since they usually have exceptions.

Most states, but not all, have laws that dictate the extent to which an indemnitor is permitted to assume the financial consequences of an indemnitee under contract. These laws are referred to as anti-indemnity statutes. They have been enacted largely to require those parties who are potentially responsible for the results of their acts or omissions to also be answerable for their consequences. These laws are not restricted to the construction industry and can apply to designers and other professionals, to property leases and other business arrangements. For purposes here, however, the discussion of anti-indemnity statutes is restricted solely to the construction industry and to contractors.

While the provisions of these statutes can vary, it is still possible to group most of them into certain general categories. For purposes of this discussion, there are five categories: (1) statutes void for sole fault, unless certain valid insurance applies; (2) statutes void for sole and partial fault, unless certain valid insurance applies; (3) statutes void for sole fault, with no insurance exceptions; (4) statutes void for sole and partial fault, with no insurance exceptions; and (5) states with no statutes voiding hold harmless provisions.

One caveat here is that because this discussion addresses only the key points of the applicable statutes, it is advisable to consult the sections of laws which also are listed in the following exhibit for the convenience of readers. Also, these laws are changing into other categories as legislators, influenced primarily by subcontractor associations, are seeking to tone down the degree of liability that has to be assumed by indemnitors. What also is important about these exhibits is what is permitted by law, from the standpoint of contractual liability insurance and additional insured endorsements (the latter of which are discussed in these pages, but not in any detail).

Indemnitor Indemnification – 50 State Survey

Void for Sole Fault—Unless Certain Valid Insurance Applies 

Alaska (A): Sec.45.45.900; AS21 

Arkansas (I): Sec.22-9-214/4-56/104 

California (A): Civ. Code Sec. 2772-2784.5 

Georgia (CI): Code.Ann.Sec.13-8-2 

Hawaii (A): Sec. 431: 10-222 

Maryland (I): Jud. Pro. Code Sec. 5-401 

New Jersey (AU): Ann. Sec. 2A:40A-1 

South Carolina (I): Sec. 32-2-10 

Virginia (A): Sec 11-4.1 

West Virginia (I): Sec. 55-8-14 

This category of ten states have statutes that hold void and unenforceable sole fault assumptions by indemnitors, but remain unaffected to the extent of the validity of certain insurance. The symbol (A) means that the insurance must be written by an admitted insured; (AU) means authorized insurer; (I) insurance; (CL) case law; (CI) certain insurance; and (LI) licensed insurer. Note that, if, for example, a CGL policy including contractual liability coverage and an additional insured endorsement for sole fault were to be written by a nonadmitted insurer in Alaska, Hawaii or Virginia, the indemnification agreement and additional insured endorsement would be void and unenforceable. If a contract were to involve a sole fault transfer of tort liability, the objective of the indemnitee should be to not only have contractual liability coverage in place, but also an additional insured endorsement in the event one of these is determined to be void and unenforceable for some reason. If both coverages are enforceable, the additional insured endorsement may likely be the better choice of the two, because of the way defense costs are handled in relation to contractual liability coverage.

Contractual liability coverage for sole fault of the indemnitee might be easier to obtain than an additional insured endorsement, because the CGL policy provides sole fault coverage, so long as it is prescribed and permitted by law, and the policy is not modified with one of two limitation endorsements discussed later in these pages: contractual liability limitation endorsement, CG 21 39; or amendment of insured contract definition endorsement, CG 24 26. (To obtain an additional insured endorsement covering for sole fault is somewhat difficult today; most insurers will not provide it. This means that contractual liability may be the only alternative.)

The fact that the laws in this category only apply to sole fault means that partial fault of the indemnitee is permitted to be assumed by the indemnitor with insurance that does not have to be written with an admitted insurer. In other words, for example, coverage for the partial fault of the indemnitee could be written on a policy written by a nonadmitted insurer in Alaska, Hawaii or Virginia.

Void for Sole and Partial Fault—Unless Certain Valid Insurance Applies

Connecticut (LI): Sec.52-572L

Delaware (AU): Tit. 6, Sec. 2704 

Illinois (CL): Ch. 740, ILCS 35/1 

Kentucky (I): KRS Ch. 371.180 

Minnesota (I): Ann. Sec. 37.01-05 

Mississippi (I): Ann. Sec. 31-5-41 

Missouri (I): R.S. 434.100 

Montana (I): Sec. 28-2-2111 

Nebraska (I): R.S. 25-21, 187 

New York (A): Sec.5-322.1 

North Carolina (I): Sec. 22B-1 

Ohio (CL): R.C. 2305.31 

Oklahoma (I): Tit. 15, Sec. 221 

Rhode Island (I): Sec. 6-34-1

This second category consists of fourteen states where both sole and partial fault assumptions of indemnitors are void by statute, but remain unaffected if certain valid insurance applies. What was mentioned with regard to the first category about sole fault and the insurance required applies here as well, except that in New York, for example, an admitted insurer is required for both sole and partial fault assumptions. Partial fault assumptions also are permitted. In both cases (sole and partial fault), it would be necessary that the additional insured endorsement and assumption of liability be covered by insurance (as opposed to self-insurance), and sometimes by a licensed or authorized insurer. If the statute merely requires insurance, coverage could be written by an excess and surplus lines insurer.

To cover partial fault of the indemnitee, it would be necessary to obtain an additional insured endorsement of the type currently offered by ISO, namely CG 20 10 07 04 and contractual liability insurance with amendment of insured contract endorsement, CG 24 26 07 04. If contractual liability limitation endorsement CG 21 39 were attached, contractual liability coverage for tort liability would be eliminated, except for insured contracts as defined in subparts a. through e.

It is important to keep in mind that some states making exceptions to anti-indemnity statutes require that the insurance be provided by an admitted, authorized, or licensed insurer. None of these states makes reference to self-insurance. In fact, based on the court cases dealing with this subject, self-insurance appears not to be viewed as insurance in many cases, and that can be a problem to an indemnitee. An actual case in point that may serve as a reminder of this is USX Corporation v. Liberty Mutual Ins. Co. and Turner Construction Co., 645 N.E.2d 396 (App. Ct. Il, 1994). Here, USX was to act as a subcontractor. Turner submitted a standard form agreement obligating USX to provide workers compensation and liability insurance and to name Turner as an additional insured. USX responded with a letter stating that USX was providing certificates attesting to its authority to act as self-insurers in the state of Illinois.

Following an injury, a USX employee filed suit against Turner who, in turn, sought to obtain indemnity from USX based on the underlying contractual obligation of USX to indemnify Turner. USX insisted, however, that it had no obligation to indemnify Turner, since the cause of the loss was the sole fault of Turner. As a result, USX argued, it would be in violation of the Illinois anti-indemnity statute to require or allow USX to indemnify for the loss involved. USX argued that the anti-indemnity statute applied equally to a promise to indemnify and an agreement to include the indemnitee/promisee in the indemnitor's/promisor's self-insurance program which, according to USX, was not the same as insurance. The Illinois statute involved at the time did contain an insurance exception to the anti-indemnity statute, which allowed the indemnitor to insure against the sole fault of the indemnitee. That exception did not require the insurance to be provided by an admitted insurer.

The court sided with USX, holding that: ". . . while a contract compelling a subcontractor to procure insurance would be valid as a logical extension of section three of the indemnity act, compelling a subcontractor to itself become an insurer . . . no such rationale for the allowance of self-insurance is provided under the Indemnity Act to allow for the substitution of self-insurance in the place of actual insurance. Moreover, there is no provision to allow for state certification or to invest in any state agency including the director of insurance with power to certify any self-insurance plan for that purpose."

The importance of this ruling and others like it cannot be overstated. Those individuals and entities that enter into construction agreements as indemnitors, with promises to insure the indemnitee, may find themselves in breach of contract if they use self-insurance. Because a true insurance policy can cover the sole fault of the indemnitee (barring any limiting endorsement), whether added as an additional insured by endorsement or automatically for liability assumed by the named insured by contract, the failure of self-insurance to apply similarly will leave the indemnitor in breach of his or her promise to the contrary. Likewise, the indemnitee will find itself in a precarious situation. Having relied on the indemnitor's promise of indemnity, the loss of that protection could have an adverse financial impact on the indemnitee.

Void for Sole Fault—In Insurance Exception 

Arizona: Sec. 32-11/59/Sec. 34-226 

Idaho: Sec. 29-114 

Indiana: Sec.26-2-5-1 

Iowa: 537A.5

Kansas: Sec. 16-121 

Massachusetts: M.G.L. Ch. 149, Sec. 290 

Michigan: M.C.L.A. Sec. 691.991 

South Dakota: Sec. 56-3-18 

Tennessee: Sec. 62-6-123 

Texas: Ins. Code 151.101-105 

Utah: Sec. 13-8-1 

Washington: Sec. 4.124.115

This third category deals with twelve states that hold void sole fault assumptions, even if contractual liability and/or additional insured coverage were to be available. Partial fault assumptions are permissible. This means that a CGL policy with amendment of insured contract endorsement, CG 24 26, and additional insured endorsement, CG 20 10 07 04, would be acceptable. The attachment of contractual liability limitation endorsement, CG 21 39, would not be acceptable. In fact, if it were attached, contractual liability coverage for tort liability, except for insured contracts in subparts a. through e., would be eliminated.

Void for Sole and Partial Fault—No Insurance Exception 

Colorado: Sec. 13-5-5-102

Florida: F.S. 725.06/725.08 

Louisiana: R.S. Sec. 2780.1 

New Hampshire: Stat. Ann. 338-A-2 

New Mexico: Sec. 56-7-1 

North Dakota: Sec. 9-08-02 

Oregon: Sec. 30.140

This fourth category deals with seven states that hold both sole and partial fault assumptions of liability to be void and unenforceable. Here, the broadest form of contractual liability coverage permitted is a limited form; in other words, indemnification applies solely to the indemnitor's fault. A CGL policy modified with the contractual liability limitation endorsement, CG 21 39, would eliminate any tort liability assumed, although some tort liability coverage remains intact with contracts in subparts a. thru e. of the insured contract definition. A substitute coverage for the indemnitee would be the owners and contractors protective liability policy. ISO has introduced special additional insured endorsements in some of these states, since the current one for owners, lessees and contractors, CG 20 10, would be overly broad for what these laws permit.

Not Voiding Hold Harmless Provisions 

Alabama: 38 So. 3d 722 

Maine: 656 A.2d 1222 (1995) 

Nevada: 237 P.3d 92 (2010) 

Pennsylvania: Tit. 68, Sec. 491 

Vermont: 702 A.2d 86 (1997) 

Wisconsin: 301 N.W.2d 201 (1981) 

Wyoming: 662 P.2d 96 (1983) 

District of Columbia: 673 A.2d 647 (D.C. 1996) 

The fifth, and final, category consists of seven states and the District of Columbia where there is no prohibition on the kind of hold harmless agreement that might be imposed, so long as the contract is clear and unequivocal in intent. If there will be any problem here, it will be when a hold harmless agreement requires the sole fault assumption on behalf of the indemnitor, and the CGL policy's contractual liability coverage is modified as a more limiting coverage and/or an additional insured endorsement is issued but is limited to the partial fault of the additional insured.

To summarize up to this point, determining the nature of required insurance coverage, in light of the differing anti-indemnity statutes, mandates the following steps: (1) read the contract to determine the nature of the contractual assumption contained therein, i.e., limited, intermediate or broad form; and (2) consult the appropriate anti-indemnity statute of the state where coverage is to apply. If the contract prescribed is otherwise permitted by the appropriate law, the next step is to check the liability to see to it that proper coverage is being provided.

 What does the Unendorsed CGL Policy Provide?

As has been mentioned, a CGL policy unendorsed with a more limiting contractual liability endorsement can be used for any degree of contractual liability assumption dealing with bodily injury and property, i.e., limited, intermediate or broad form. If the named insured, for example, were required to hold harmless and indemnify an indemnitee for no more than its partial fault (which could amount to up to 99 percent of the indemnitee's fault), all that would be necessary here would be to determine if the hold harmless agreement is valid and enforceable.

It, however, is not that easy to determine coverage anymore, at least since 1988 when ISO introduced the contractual liability limitation endorsement, CG 21 39. When this endorsement is issued, often in states that still permit the intermediate and broad form hold harmless agreements, the endorsement eliminates coverage for tort liability assumed under subpart f. of the insured contract definition, and creates a potential gap in coverage. What is left is coverage for the contracts itemized in subparts a. through e., which, incidentally, can still include assumed tort liability.

The gap, therefore, is any contractual agreement involving a hold harmless agreement for tort liability assumed in a state that still permits that kind of an agreement with backup of insurance, but what is issued is some restrictive contractual liability endorsement.

What sometimes is overlooked is that the CGL policy is global. The fact that the policy is written in a state, such as New Mexico, does not mean that the named insured will not have broader contractual liability obligations in other states that permit them. If the CGL policy contractual liability provision had a savings clause, it would alleviate the problem because the coverage of the CGL policy would only apply to the extent permitted by law. Thus, instead of determining what the contract says and then determining if it is valid and enforceable, one simply checks the CGL policy's coverage first and then determines whether the contract as prescribed is limited, intermediate or broad and whether any law precludes it.

Sometimes, the CGL policy is not modified with that drastic contractual liability limitation endorsement, CG 21 39, but, instead, with the amendment of insured contract definition endorsement. This endorsement was introduced by ISO in 2004 to give underwriters a way to limit coverage for tort liability assumed under a contract (other than those types of contracts specifically listed under subparts a. through e. of the insured contract definition in the policy). When issued, this endorsement limits contractual liability of the indemnitee to acts or omissions caused in whole or in part by the indemnitor. The indemnitee, in other words, obtains coverage, but is limited to its partial fault (which can range from 1 percent to 99 percent). This means that the indemnitor first has to be at fault because that coverage is activated. This endorsement, of course, will also respond when the indemnitor is totally at fault.

Even though the amendment of insured contract definition endorsement, CG 24 26, is not as limiting as the contractual liability limitation endorsement, CG 21 39, the former endorsement can still create a gap when it is issued on a CGL policy written in any one of the states listed in the first and second categories noted above, and the fifth category where there are no hold harmless prohibitions, other than that the contract be clear and unequivocal in intent (which sometimes is difficult to ascertain).

Let's assume, for example, that a CGL policy is issued in New York where an indemnitee is seeking coverage for the financial consequences of its sole acts or omissions. Assuming the insurer issuing the CGL policy is an admitted one in New York, coverage should apply, if: (1) the contract is considered to be valid and enforceable, and (2) the CGL policy was issued by an admitted insurer. If, however, either one of those more limiting contractual endorsements are issued (CG 21 39 or CG 24 26), there will be a gap in coverage.

Assume the same set of facts as above, except that the insured is domiciled in New York, and does work in Indiana. Even though the CGL policy is written so as to cover broad form contracts in New York, that coverage will not apply in Indiana because sole fault assumptions are not permitted and it does not matter that the CGL is not endorsed with one of the two limiting endorsements. It is the state statute that controls.

Assume, finally, that an indemnitor in Alabama is required to hold harmless and indemnify an indemnitee for its partial fault. The indemnitor's CGL policy is modified with contractual liability limitation endorsement, CG 21 39. If a suit arises where the indemnitee seeks coverage for its partial liability assumed by the indemnitor, the latter will be confronted with what is referred to in risk management parlance as "passive retention", or in plain terms, surprise!

As should be readily obvious, the limiting contractual liability endorsements can create problems, particularly when they are issued automatically instead of based on some underwriting requirements on a state-by-state basis. Actually those endorsements are not necessary, unless it is the insurer's intent to not give its named insureds the cover they may be required to give, even when otherwise permitted by law. Named insureds of CGL policies and their producers, therefore, need to be careful how a policy is prepared because failure of the named insured to provide the coverage agreed to by contract could result in a breach of contract or failure to procure (which is not a subject of contractual liability insurance).

 Defense and Coverage for Legal Costs

It sometimes does not matter whether an indemnitee wants to be defended in a suit involving a contractual agreement, at least insofar as the ISO commercial general liability is concerned, because there are certain conditions that must be met. If the conditions are not met, the indemnitee will have to provide its own defense and then seek reimbursement from the indemnitor's insurer, which sometimes is not easy either. The usual dispute concerns the question of what "reasonable" fees and costs include.

Looking at the ISO commercial general liability policy, defense and legal costs are addressed first within contractual liability exclusion b. (2) and, secondly, under the policy's supplementary payments. Referring first to contractual liability exclusion b. (2), it reads:

Solely for the purposes of liability assumed in an insured contract, reasonable attorneys fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of bodily injury or property damage, provided:

a. Liability to such party for, or for the cost of, that party's defense has also been assumed in the same insured contract; and

b. Such attorneys fees and litigation expenses are for defense of that party against a civil or alternative dispute resolution proceeding in which damages to which this insurance applies are alleged.

Up to this point, first of all, there is no mention here that the insurer will defend the indemnitee. The only defense the insurer promises at this point is for the insured. What this provision says next is that for a party other than an insured (i.e., the indemnitee), reasonable attorneys fees and necessary litigation expenses incurred (by the indemnitee or for the indemnitee) are considered to be damages. This is unlike the fees and expenses incurred by the insurer for the insured which are viewed as being in addition to the damages. Liability for reasonable fees and expenses incurred by the indemnitee, furthermore, must have been assumed in the same insured contract covering the named insured (indemnitor) and be for damages to which the insurance applies. Rest assured that when the reservation of rights is issued by the insurer, it will explain that it will not pay for any fees or costs having to do with allegations not covered by the policy, or that it intends to seek reimbursement, if it pays first.

Before the above provision is activated, the entire policy must be reviewed, because, as mentioned, the supplementary payments provision also addresses the matter of defense, along with fees and costs of indemnitees. The term "supplementary payments" means in addition to other provisions that provide the payment of sums. Part 2 deals with defense of insureds and indemnitees. It reads as follows:

 2. If we defend an insured against a suit and an indemnitee of the insured is also named as a party to the suit, we will defend that indemnitee if all of the following conditions are met: