Insurance is a common component of every business, whether large or small. Most small businesses insure themselves under a commercial general liability (“CGL”) insurance policy, many of them without dedicating time to evaluating the coverage they are purchasing. A CGL policy is a type of insurance policy which provides liability insurance for general business risks. The broad categories of coverage available under a CGL policy include claims for bodily injury, property damage, and personal and advertising injury. Normally, much to the surprise of the policyholder, CGL policies exclude many types of claims from coverage. CGL insurance is not mandatory in Texas, but nonetheless should be considered essential for many businesses.
A CGL policy provides broad coverage but is significantly narrowed by exclusions. An exclusion is a provision in an insurance policy referring to a specific hazard that is not covered under the policy. If a consumer wishes to obtain coverage for an occurrence that is excluded from the CGL policy, they must purchase that coverage separately, if it is available at all. Many of the exclusions in a CGL policy are often misunderstood. One important exclusion, which may be found in standard CGL policies, such as the Insurance Services Office, Inc. (“ISO”) CG 00 01 form, is the contractual liability exclusion, which explicitly excludes coverage for damages arising from contractual liability. CG 00 01 defines contractual liability as those damages which the insured is obligated to pay by reason of an assumption of liability agreement. In Texas law, in an assumption of liability agreement, Party “A” agrees to directly assume the risks of Party “B” when it would not otherwise be responsible for those risks. Assumption of liability agreements may present themselves in different ways, such as indemnification or hold harmless agreements. Because they are quite common in the business contracts of today, special care should be taken to analyze the risks and implications of executing a contract containing an assumption of liability agreement.
The contractual liability exclusion is limited by two exceptions. In insurance law, an exception to an exclusion describes the circumstances in which the exclusion does not operate to deny coverage. First, ISO CG 00 01 provides that the contractual liability exclusion will not bar coverage for damages that the insured would have in the absence of an assumption of liability agreement. In addition, ISO CG 00 01 contains the “insured contract” exception. ISO CG 00 01 contains several definitions of an “insured contract,” the most important being that an insured contract is an agreement pertaining to the insured’s business under which the insured assumed the tort liability of another party to pay for bodily injury or property damage to a third person. ISO CG 00 01 defines tort liability as liability that would be imposed by law in the absence of any contract or agreement.
The effect of a contractual liability exclusion, and its exceptions, may vary from state to state. In 2014, the Texas Supreme Court had a chance to evaluate and interpret the contractual liability exclusion in Ewing Construction Company v. Amerisure Insurance Company. In Ewing, Ewing, a construction company, entered into a contract with a school district to serve as general contractor to a project. Later, the school district filed suit against the construction company for faulty construction. Ewing tendered its defense to Amerisure, its insured, under a commercial package policy that included CGL insurance. Amerisure denied coverage, so Ewing filed suit in federal district court seeking a declaration that Amerisure breached its duty to defend and indemnify Ewing for the damages that Ewing was liable to the school district. The Court determined that “assumption of liability” means that the insured has assumed a liability for damages that exceed the liability it would have under general law. Under the general law, a contractor has a legal duty to perform its contract with skill and care. The Court reasoned that a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, does not enlarge its duty to exercise ordinary care in fulfilling its contract—any other interpretation would render the term “assumption” superfluous. Accordingly, the Court held that Ewing’s liability to the school district did not trigger the contractual liability exclusion, meaning that coverage under Amerisure’s policy was not excluded by the contractual liability exclusion.
Compare Ewing with an earlier (2010) Texas Supreme Court decision, Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London. In Gilbert, during a Dallas Area Rapid Transit Authority (DART) construction project, unusually heavy rains resulted in water damage to a building adjacent to the construction site. The owner of the building sued DART and its contractors, alleging that construction activities caused the water damage. The building owner sued the general contractor, Gilbert Texas Construction, for breach of contract. Under Gilbert Texas Construction’s contract with DART, Gilbert had agreed to repair any damages to the property of a third party that resulted from the failure to comply with the requirements of the contract or from the failure to exercise reasonable care in performing the work. Gilbert tendered the claim to Underwriters, who denied coverage under the contractual liability exclusion. The Court agreed with the Underwriters, explaining that under its contract with DART, Gilbert undertook a legal obligation to protect improvements and utilities on property adjacent to the construction site, which was an obligation separate from Gilbert’s obligation to exercise care in performing its work. Thus, the contractual liability operated to deny Gilbert’s claim for damages to the owner of the building.
It is important to remember that a denial of coverage letter does not necessarily mean that coverage does not exist under the policy. Because insurance has its basis in contract law, a policyholder may resort to remedies available under the Texas Insurance Code and Texas Deceptive Trade Practices Act. Moreover, if you successfully sue an insurer for breach of contract, attorney’s fees and costs may be recovered. In any case, every business should ensure they have an understanding of the coverage available under their specific GCL policy, which may vary from the industry-standard GCL policy.