Contractors often enter into contracts with third parties such as project owners, subcontractors, equipment lessors, landlords, municipalitiess, etc. that include hold harmless and indemnification provisions. Such a provision requires that the contractor assumes liability that would ordinarily belong to the other party. If the other party is in a position of power over the contractor, it is not uncommon for the terms of the hold harmless/indemnification to be extremely burdensome.
The result can be that the contractor’s General Liability policy may not cover all of the liability assumed by the contractor resulting in significant out-of-pocket expenses or bankruptcy.
Most contractor General Liability policies include a coverage called contractual liability that covers certain assumptions of contractual liability. However, the contractual liability coverage under a General Liability policy is still subject to the same coverage limitations as regular negligence-based claims. For example, a General Liability policy covers bodily injury and property damage liability caused by an occurrence which is not subject to the standard policy exclusions. The same limitations apply to coverage under any contractual assumption of liability.
This is a complex area with which many attorneys and insurance agents struggle. The problem is that attorneys often don’t understand insurance coverages and insurance agents don’t understand contract law. As a result, it is best to consult with both parties before entering into a contract with a hold harmless/indemnification provision.
The Independent Insurance Agents & Brokers Association recently published an excellent article that illustrates this point with an example of a common provision that is totally one-sided and requires a contractor to assume much more liability than is covered under a General Liability policy. In the illustration, the following requirements go way too far:
We offer all of our clients a contract-review service that includes advice on the fairness of indemnification/hold harmless provisions and how to effectively negotiate away unfavorable provisions.
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