A project owner and its subcontractors were entitled to be defended and indemnified under its contractor’s commercial general liability (CGL) policy. The “contractual liability” exclusion of the policy was not applicable because indemnity was afforded under an “insured contract,” which resulted in an exception to the standard contractual liability exclusion. The damages in question arose out of bodily injury sustained by an employee of the contractor for which the contractor had immunity from suit pursuant to the workers compensation statute. This did not protect the contractor and its CGL carrier, however, from the contractual indemnity obligation to its client to defend and indemnify the client against a suit by that same employee. Borsheim Builders Supply, Inc. v. Manger Insurance, Inc., 917 N.W. 2d 504 (2018).

The master services agreement included the following indemnification clause:

12. Indemnities.

     a. Contractor hereby agrees to release, defend, indemnify and hold the “Whiting Group” harmless from and against any and all loss, cost, damage or expense of every kind and nature … arising out of bodily injury … to the Contractor Group, … WHETHER OR NOT RESULTING IN WHOLE OR IN PART FROM THE SOLE, CONCURRENT, OR COMPARATIVE NEGLIGENCE, OR STRICT LIABILITY OF THE Whiting GROUP.

The contract required the contractor to “secure and maintain” insurance coverage that “shall extend to and protect the Whiting Group to the full extent and amount of such coverage.” In addition to the policy containing an exception to the exclusion for an “insured contract,” it also included an additional insured endorsement for owners, lessees or contractors and scheduled persons or organizations.

One of the contractor’s employees was injured while working on Whitling’s oil rig site when a backhoe, owed by one of Whitling’s other contractors (CSI, Inc.) released a beam that crushed the foot of an employee of that contractor.   The employee sued CSI and Whitling. The attorney defending those firms tendered a demand for indemnity and defense to the contractor under the indemnity provision and to the contractor’s CGL carrier under the additional insured provision of the policy.

At the trial court, the judge entered an order for declaratory judgment concluding that the contractor was statutorily immune from liability under the state’s workers compensation act and that the CGL’s policy’s contractual liability exclusion applied to preclude coverage because of this immunity.

On appeal, the appellate court analyzed the meaning of an “insured contract.” It quoted from a treatise as follows:

Definition f of “insured contract” is most commonly the subject of litigation. In order to fall within definition f, and fall within the exception to the contractual liability exclusion, three elements must be established: (1) the contract must pertain to the insured’s business; (2) the insured must assume the tort liability of another; and (3) the tort liability must be liability that would be imposed by law in the absence of any contract or agreement.

The court concluded that the master services contract falls within the definition of an “insured contract.” As stated by the court, “Subparagraph 9(f) plainly states an “insured contract” includes “[t]hat part of any other contract or agreement pertaining to your business … under which you assume the tort liability of another party to pay for ‘bodily injury’ … to a third person … provided the ‘bodily injury’ … is caused, in whole or in part, by you or by those acting on your behalf.”

The court further explained,

Construing the plain language of the CGL policy, we conclude that CSI is an additional insured under the policy endorsement, that the “contractual liability” exclusion does not apply to CSI because the Stecs’ claims against CSI are direct claims of tort liability, and that the “contractual liability” exclusion does not apply to Borsheim because the exception applies for damages “[a]ssumed in a contract or agreement that is an ‘insured contract’,” i.e., the MSC. We therefore conclude the district court erred in ruling that the CGL policy did not provide coverage for the underlying Stec lawsuit against CSI.


About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 21, No. 2 (Feb 2019).

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