Most contracts for construction work include provisions called “indemnification” or “hold harmless” agreements. These agreements require one party to the contract to compensate (indemnify) the other party for certain costs. The costs include damages the owner or general contractor (GC) must pay because of injury to others or damage to others’ property that result from the contractor or subcontractor’s work. The agreement may also cover other costs, such as attorneys’ fees.
In short, the owner or GC is saying to the contractor or sub, “If we get sued over something related to the work you do for us, you’re going to pay for it.”
When a contractor must fulfill this part of the contract, substantial amounts of money are involved. Fortunately, insurance might cover the expense.
The terms in the contractor’s general liability insurance policy can be confusing at first glance. The standard commercial general liability coverage form actually states that the insurance does not apply to bodily injury or property damage for which the insured organization must pay damages because it assumed that obligation in a contract or agreement. However, the form goes on to say that the insurance does apply to liability for damages 1) the insured contractor would have if there was no contract, or 2) the contractor assumes in what the form defines as an “insured contract.”
The form’s specific definition of “insured contract” includes several specific types of agreements. It also includes other agreements where the insured organization assumes the liability of another organization to pay damages for injury or damage to a third party caused by negligence. The insurance will pay for damages covered by these contracts only if the two parties execute the hold harmless agreement before the accident causing the loss occurs. Here are a few examples of how this coverage might apply:
GC and subcontractor sign a contract for the sub to dig the foundation for a new building. The contract includes a hold harmless agreement that benefits the GC. Two weeks after they sign the contract, an employee of another sub on the site falls into the hole the sub dug. The injured worker sues both the sub and the GC. The accident happened after the contract was signed, and the agreement fits the definition of an insured contract. Therefore, the sub’s liability insurance will cover damages both the sub and the GC owe for this accident.
Suppose, though, that the GC hires the sub in a hurry. Because the project is behind schedule, the GC tells the new sub to start work before any contracts are signed. Remember, the insurance does not apply if the contract is not executed before the loss. If someone were to fall in the hole and sue, the sub’s insurance would not cover this loss. Also, the insurance would not cover a loss if the contract was with a railroad for certain work near its tracks.
Coverage for liability assumed in contracts is very important for construction projects. These agreements are very common. Contractors who do not have this coverage are unable to comply with contract terms. Some policies may change the definition of “insured contract,” so it is important that contractors verify with their insurance agents that the coverage is in place. This is an area that is too important for contractors to leave to chance.
BGES Group’s office, located in Larchmont, NY is a full service insurance agency offering, Property, Liability, Umbrella Liability, Business Auto, Bid & Performance Bonds, Inland Marine, Worker’s Compensation, Worker’s Compensation Premium Recovery, New York State Disability, Group Health, Life insurance, Personal lines and Identity Theft.
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