Does My Insurance Cover My Indemnity Agreement?

The passage of HB 2093 (the anti-indemnification bill) has contractors reviewing their indemnity contracts and their insurance coverage.  ASA Houston's "This Week" has a note on HB 2093's general requirements:

This recently-passed legislation will generally make broad form indemnification provisions in a construction contract void and unenforceable. (See page 4, line 23 of HB2093 for exclusions.) This Act does NOT apply to a provision which requires one to indemnify or defend against a claim for the bodily injury or death of an employee of the indemnitor or its subcontractors of any tier. Most general liability policies will provide coverage for contractual indemnification of this sort. But be careful: There are endorsements designed to strip this coverage away. Does your policy have such an endorsement? Consult your insurance advisor.

Consider this your free consultation!  The Dec Page has been on top of the indemnity bill's progress in the legislature from the start.  See our latest round up here.  We briefly note that there are two other exceptions to the statute in addition to the subcontractor employee exception alluded to above.  First, the law does not apply to any construction contract for "a single family house, townhouse, duplex, or land development directly related thereto."  Second, the law will not apply to a "public works project of a municipality."  

The second exception is a little cryptic leaving open the question of exactly what sorts of contracts will fall within this definition.  The statute does not have its own definition of a "municipality."  For example, will an independent school district qualify?  That seems like a stretch, but we remain uncertain.

But the ASA note also warns contractors about "endorsements" designed to strip away "coverage for contractual indemnification."  Such dragons do indeed exist.  Contractors called upon to sign any sort of indemnity need to be aware of them and demand that their brokers keep them off their general liability (GL) policies and umbrella and excess liability (UL) policies.  Before we look at those endorsements, let's first understand how a liability policy covers your indemnity in the first place.

Your GL policy will pay for damages (bodily injury and property damage) to third parties arising from an occurrence caused by your operations (current and completed).  By signing an indemnity, you are assuming responsibility for indemnity and the defense of damages that may or may not have been caused by your negligence.  With an intermediate or broad form indemnity, you are assuming, by contract, responsibility for indemnity and defense for the negligence of others.  Your standard ISO form insurance policy provides contractual liability coverage for these promises under its "insured contract" definition.  

Thus, your insurance will step in and pay for the indemnity and defense obligations you have assumed by contract.  That is the way it SHOULD work for contractors.

There are endorsements designed to limit this coverage or even to take it away entirely.  CG 24 26 "Amendment of Insured Contract Definition" is designed to strip away contractual liability coverage for any broad form or "sole negligence" indemnity.  Far worse is CG 21 39 "Contractual Liability Limitation" which strips away ALL coverage for indemnity agreements.  This can occur in the primary GL and throughout the umbrella and excess layers.  

Any of these endorsements can cause a contractor to be in breach of contract depending on what sort of indemnity has been agreed to by contract.  As discussed, HB 2093 will not eliminate the need for broad form or intermediate form indemnities as they will still apply in the case of subcontractor employee claims.

At the risk of adding a layer of complexity to this discussion, we will also note that contractors should also monitor the same sorts of endorsements limiting their additional insured provisions.  

This is an extremely complex coverage issue.  Your broker can help you understand it and monitor your policies to make sure you do not have an endorsement that is problematic.  You should not have to memorize endorsement numbers.  However, your broker is not a mind-reader.  Be sure your broker knows what kind of contracts you are signing in the course of your business and send them to him to review and confirm compliance with your insurance coverage.