Potential Gaps in Indemnity Coverage

By David S. Lynch

Indemnity agreements are standard in most construction contracts. These provisions generally require contractors to indemnify others for personal injury claims made by the contractor’s employees against other parties on the project. Coverage for this liability is found in the contractor’s general liability policy which, while excluding liability assumed under a contract, allows coverage for this liability by an exception to the exclusion for “insured contracts,” the definition of which, in general, includes the assumption of the tort liability of others.

Two potential gaps may exist which removes this vital protection. First, some Texas courts have held that pass through indemnity agreements are not “insured contracts” since the insured is not assuming the tort liability of the other party but instead is assuming the other’s contractual liability. Other Texas courts have disagreed and found coverage under certain circumstances. An example would be as follows:

The general contractor agrees to indemnify the owner for any personal injury claims made by any workers injured on the project. The subcontractor agrees to indemnify the general contractor for any claims made against the general contractor arising out of injuries to the subcontractor’s employees. An employee of the subcontractor makes a claim against the owner. The owner demands that the general contractor indemnify it for the claim. The general contractor demands that the subcontractor indemnify it for the owner’s claim for indemnity against the general contractor.

Some courts have held that the pass through indemnity claim against the subcontractor is not for the general contractor’s tort liability, but the general contractor’s contractual liability. Thus, these courts hold that the claim is not covered. While other have disagreed, a potential exists that the subcontractor may not have coverage for this claim.

Second, some insurance companies are amending the definition of “insured contract” to require that the accident out of which the indemnify claim arises be caused by the conduct of the insured. Some courts have interpreted this language to require that the injury be proximately caused by the negligence of the insured, narrowing the scope of coverage. An indemnity agreement in which a party agrees to assume the liability of others even where the loss is not caused by the contractor’s fault may not be covered under the contractor’s insurance policy.

To avoid any potential gaps in coverage a contractor should avoid indemnifying others for the other party’s contractual indemnity obligations. If, in the scenario above, the general contractor insists that the owner be protected, it is better to indemnify the owner for the owner’s tort liability than to indemnify the general contractor for the general contractor’s liability to the owner. Further, in the event that a contractor is required to agree to a broad indemnity agreement, the contractor should review its insurance in advance to make sure that the scope of the policy’s contractual indemnity coverage will extend to the broad indemnity obligation. The lesson to be learned is that a review of the coverage provided by a policy in advance may well allow a contractor to avoid an exposure which can cause an extreme financial risk.

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