Author: VU Faculty

An insured who leases premises accidentally damaged the building with a backhoe. He has a written lease on the premises and the lease makes him responsible for damage to the property. The agency feels that since this is an "insured contract," the exclusion for damage to property you rent does not apply and the damage should be covered under the contractual liability.

"We have an insured who leases a premises and while operating his backhoe he accidently damaged a door at the premises. He has a commercial general liability policy with the CG 00 01 12 07 form. The insurance company is denying liability for this claim since he is renting the property. Our question is that he has a written lease on this premises and in the lease it makes him responsible for damages to the property. We feel that since this is a contract, the exclusion for damage to property you rent does not apply and should be covered under the contractual liability. We would like your opinion."

This is an interesting premise and question. Just recently we were contacted by someone writing an article on this very subject that takes your position on this. We ran this by the VU faculty and their responses are below.

No it does not. If you look at the exception in the GL exclusion for assumption of liability (by way of contract), at the end of the exception is the statement, "(b) Such attorney fees and litigation expenses are for defense of that party against a civil or alternative dispute resolution proceeding in which damages to which this insurance applies are alleged." That means the coverage provided for contractual liability still must run by the policy language, including the exclusion 

Here’s an indemnity agreement that includes a requirement to insure:

“To the fullest extent permitted by applicable law, Contractor shall insure and defend, indemnify, and hold harmless Owner and Agent and their respective officers, directors, members, employees, agents, shareholders, partners, joint venturers, affiliates, successors, and assigns from and against any and all liabilities, obligations, claims, demands, causes of action, losses, expenses, damages, fines, judgments, settlements, and penalties including, without limitation and without regard to the cause or causes thereof….” [emphasis added]

Since the contract makes the signer responsible for “any and all liabilities,” are you saying that the contract effectively waives ALL of the CGL exclusions? Since it also requires coverage for fines and penalties, does it waive the definition of “property damage” so that there is coverage for things like this?

If a lease requirement to indemnify and insure for loss to the premises can override an exclusion for damage to rented property, then a contract can override ANY exclusion in the CGL policy by that logic. If that were true, then everyone writing contracts would simply add a line that waives all CGL exclusions and the contract would rule. 

No – with some very limited exceptions (the Employers Liability exclusion expressly states it does not apply to liability assumed by an insured contract), all exclusions in the CGL policy apply to any liability assumed in an “insured contract.” Consider the preamble to the exclusions in conjunction with the exclusion cited by the insurer as it may provide some insight – “This insurance does not apply to:  J. “Property Damage” to: (1) Property you…rent…”  In this context, “This insurance” means the entire CGL policy. Therefore, any coverage that may be found under an “insured contract” is part of “This insurance” and thus is subject to all exclusions. 

Sorry, but no. Contractual "follows" the form and the exclusions apply to contractual just like they apply to any other GL claim. There are a couple of exceptions (EL and aircraft/watercraft) but NO exceptions in the PD area.  Also, remember that Contractual has nothing to do with the performance of contracts. It gives you coverage for BI/PD assumptions to third parties, assuming an exclusion does not apply. 

The contractual liability coverage is for indemnity or hold harmless agreements where your insured is assuming responsibility to pay damages and/or defense costs assessed against another party. Contractual liability coverage is not intended to pay for damage to property in the care, custody or control of your insured. The insurance industry looks as the care, custody and control exposure as a first party exposure. There is a property form called Legal Liability that should cover damage to described property caused by a vehicle that results from the negligence of your insured. 

All of the exclusions of the CGL policy apply to contractual liability coverage. Nice try though. 

The exclusion b. Contractual Liability does not apply to "insured contracts," but an exception to one exclusion does not override another exclusion, and exclusion j. Damage to Property still applies. The correct thing to do when a lease makes the lessee responsible for property damage is to get the appropriate Property coverage for the exposure. 

It seems there is a fundamental misunderstanding of the limited contractual liability coverage in the CGL. A lease is automatically covered whereby you assume the landlord's tort liability to a third party. For example, many leases require you to hold the landlord harmless for someone injured on your premises even if you're not at fault. Your situation does not involve the assumption of liability of the landlord, but rather a direct contractual obligation to the landlord. On top of that, there's nothing in the contractual liability coverage that even remotely implies it supersedes all of the exclusions in the CGL...contractual liability is an exclusion itself; you're just dealing with an exception.

Last Updated:  June 19, 2009