The Contractual Liability Limitation eliminates coverage for liability assumed in a hold harmless or indemnity agreement. A typical hold harmless agreement includes indemnity for both damages and defense. In a recent California Supreme Court case, Crawford v. Weather Shield, the court held that the obligation to defend is immediate regardless of any actual damages caused by the subcontractor. Commercial General Liability policies affording coverage for damages arising from “Insured Contracts” typically include coverage for such costs, unless the Contractual Liability Limitation is attached.
For illustration, assume an electrician performs work on a new home for a general contractor (“GC”). The subcontract agreement likely requires the electrician to pay for the GC’s cost of defense if the homeowner files suit against the GC. These elements of the contract fit the definition of “Insured Contract” under the terms of the Policy. In California, the defense obligation is immediate, regardless of any actual damages caused by the electrician. The Contractual Liability Limitation eliminates coverage for these defense costs. The subcontractor essentially becomes uninsured for the contractual liability.
Many Certificate Holders, including municipalities, require Contractual Liability coverage and demand verification signed by the contractor’s agent. Therefore, understanding contractual liability is important not only to your clients, but also to producers and CSR’s placing coverage for contractor clients.