The Role of Insurance vs. Indemnification in Contracts

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In a contract, you are contractually bound by the indemnification article to pay for liabilities in whatever form you prefer. Payment of potential liabilities could bankrupt a company when the liability’s value exceeds the assets of the firm. As a result, contractors obtain insurance to cover these situations. The Owner typically recognizes this and includes another contract article (“Insurance”) to ensure the contractor has adequate means to pay for its liabilities, thus protecting the Owner.

The most common insurance policy obtained by Contractors is the Commercial General Liability (CGL) occurrence-based policy written on the ISO CGL Form. Many insurance companies either use this Form as published or make slight revisions to it and issue it as their manuscript form.

The CGL insurance form provides coverage for a contractor’s indemnification obligation if that indemnification is included in an “insured contract”. The CGL policy defines an “insured contract” as:

• one for the lease of premises
• a railroad sidetrack agreement
• indemnification of a municipality
• an elevator maintenance agreement
• an agreement in which you assume the tort liability of another party to pay for bodily injuries and/or property damages

There are some restrictions but for the most part, the typical construction contract would be included.

The unendorsed CGL policy would cover the Broad Form Indemnification language. However, not all indemnity articles are covered by the insurance (ex. any indemnification beyond “bodily injury” or “property damages” are not covered). As an example, intentionally causing property damage to the indemnitee’s property, would not be covered by insurance.    

In recent years, some insurance companies have tried to change the definition of the “insured contract”. By doing so, they are attempting to limit the scope of the indemnification. Some insurance carriers provide coverage for the Intermediate Form Indemnification, but not the Broad Form indemnification. Others may limit indemnification coverage to the Limited Form only. This is typically accomplished either by changing the “boilerplate” policy language or by including an endorsement making the change.

Consult with your Insurance Broker when obtaining a new CGL policy, and at each renewal to ensure no changes have been included. If your CGL only provides coverage for the Intermediate Form, it will be necessary to negotiate changes in the contract if it requires Broad Form Indemnification. Similarly, if the Limited Form Indemnification is only provided by your CGL.

Regarding the definition of “insured contract”, some insurance policies include the term “written contract” so only those agreements that are in writing and executed by the parties provide any indemnification coverage. Should that be the case, “handshake” or verbal agreements, which may in certain instances be binding, but may have no indemnification coverage. Be knowledgeable of your policy’s requirements.

Make an appointment with your Insurance Broker to review the policy, including the endorsements since they change the coverage of the “boilerplate” policy. If you have any additional questions, reach out to TSIB and speak with one of our Risk Consultants to ensure your contracts have the proper indemnification and insurance articles.

TSIB’s Risk Consultants are currently servicing the following locations:

East Coast: New York City, NY; Bergen County, NJ; Fairfield County, CT; Philadelphia, PA

Texas: Austin, San Antonio, Houston, Dallas

California: Orange County, Los Angeles County, Riverside County, San Bernardino County, San Diego County