The Contractual Liability Exclusion
In the standard Commercial General Liability (CGL) policy, Coverage A (Bodily Injury and Property Damage) contains a specific exclusion for Contractual Liability. This exclusion states that the 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.
However, this exclusion is not absolute. For students preparing for the practice General Liability questions, it is vital to understand the two primary exceptions where coverage is actually granted back:
- Tort Liability: Liability that the insured would have in the absence of the contract or agreement (legal liability imposed by law).
- Insured Contracts: Liability assumed in a contract that meets the policy's specific definition of an "insured contract."
To master this topic, you should first review the complete General Liability exam guide to see how this fits into the broader policy structure.
The LEASE Mnemonic: Defining Insured Contracts
Deep Dive: The Five Named Insured Contracts
The CGL policy defines several specific types of agreements as Insured Contracts. These are automatically covered, meaning the exclusion for contractual liability does not apply to them. The first five are often remembered by the acronym LEASE:
- Lease of Premises: Most lease agreements where a tenant assumes the liability of the landlord for the rented space. (Note: This does not include fire damage to the premises, which is handled under Damage to Premises Rented to You).
- Easement or License Agreements: Contracts allowing the use of someone else's land, except for construction or demolition operations on or within 50 feet of a railroad.
- An Obligation to Indemnify a Municipality: Required by ordinance, except in connection with work for a municipality (e.g., a permit to hang a sign over a public sidewalk).
- Sidetrack Agreements: Agreements with a railroad for the use of a private spur track.
- Elevator Maintenance Agreements: Contracts where a party assumes liability for the maintenance of an elevator.
The 'Blanket' Contractual Coverage
In addition to the LEASE contracts, the definition includes a sixth, broader category: Any other contract or agreement pertaining to the insured's business under which the insured assumes the tort liability of another party to pay for bodily injury or property damage to a third person or organization. This is often referred to as 'blanket' contractual liability.
Covered vs. Excluded Contracts
| Feature | Type of Contract | Coverage Status | Reasoning |
|---|---|---|---|
| Apartment Lease | Covered | Falls under 'Lease of Premises' definition. | |
| Railroad Sidetrack | Covered | Specifically listed as an 'Insured Contract'. | |
| Professional Services | Excluded | Contractual assumption of professional liability (e.g., architect errors) is generally not covered. | |
| Construction near Railroad | Excluded | Easement/License agreements within 50ft of a railroad for construction are excluded. |
Defense Costs and Indemnitees
When an insured assumes the liability of another (the indemnitee) under an insured contract, the CGL policy may also provide for the defense of that indemnitee. For the insurer to defend the indemnitee directly, specific conditions must be met:
- The insured must have assumed the obligation to defend the indemnitee in the contract.
- The defense costs must relate to a claim for which coverage is provided.
- There must be no conflict of interest between the insured and the indemnitee.
- The indemnitee must agree in writing to cooperate with the insurer and provide legal documents promptly.
If these conditions are met, the defense costs paid for the indemnitee are typically outside the limits of insurance, meaning they do not reduce the policy's aggregate or per-occurrence limits, similar to the insured's own defense costs under Supplementary Payments.
Frequently Asked Questions
No. The 'Insured Contract' exception only applies to the assumption of tort liability (liability for negligence). It does not cover a failure to perform the duties required by the contract itself, such as a failure to pay rent or complete a project on time.
If the contract does not meet the policy definition and the insured is not liable under tort law (independent of the contract), the Contractual Liability Exclusion will apply, and the insurer will likely deny the claim.
Yes, under the standard ISO CGL form, a sidetrack agreement is one of the five specifically named 'Insured Contracts' and is covered automatically without requiring special endorsements.
They are outside the limits only if the specific conditions for defending the indemnitee are met. If those conditions are not met, but the insured is still required to indemnify the party for their legal costs as part of the damages, those costs may fall inside the policy limits as part of the total loss payment.