Hold harmless agreements have become standard parts of construction contracts. In a hold harmless agreement (also known as an indemnity agreement), one party (the indemnitor) agrees to pay for damages assessed against another party (the indemnitee) for its liability for injuries or property damage arising out of the project. There are three basic forms of hold harmless agreements and they have different implications for a contractor’s Liability insurance.
Broad Form: The indemnitor assumes all liability for accidents arising out of the project, regardless of who was at fault. Under this form, a subcontractor pays for its own sole negligence, its joint negligence with a general contractor for an accident, and the sole negligence of the general contractor. Therefore, an electrical contractor is liable if an employee injures another sub’s employee with a dropped tool; if an employee leaves materials in a walkway at the GC’s direction, causing another sub’s employee to trip and injure himself; and if the scaffolding, set up by the GC for the electrician to use, collapses on top of another sub’s employee. Many states prohibit this form of agreement unless the indemnitor finances the assumed liability with an insurance policy.
Intermediate Form: The indemnitor assumes all liability for accidents arising out of the project except for those where the indemnitee is solely negligent. Under this form, the subcontractor pays for all accidents in which it is at least 1% liable. In the above examples, the sub would not assume liability for the incident involving the scaffolding, but it would assume liability for the dropped tool and the materials left in the walkway.
Limited Form: The indemnitor assumes liability for accidents arising out of the project, but only to the extent of its own liability. Under this form, in an accident where each party was 50% liable, the sub would owe 50% of the judgment amount to the GC. In the case of the materials left in the walkway, if the jury held each party 50% liable and the award was $100,000, the GC would pay the $100,000 and the sub would owe the GC $50,000.
The ISO Commercial General Liability Coverage Form excludes coverage for injuries or damage for which the insured is obligated to pay damages because it assumed liability in a contract or agreement. However, the form makes an exception for liability assumed in “insured contracts,” including parts of contracts where the insured assumes the tort liability of another party to pay for injuries or damages to a third party. This exception gives a subcontractor insurance coverage for liability it assumes in a hold harmless agreement, if the injury or damage occurs after the contract’s execution. The policy will cover the GC’s attorney fees if the hold harmless agreement requires the sub to pay for them.
Another way for a sub to insure assumed liability is to add the GC as an additional insured under the CGL policy. However, it is important to understand that ISO changed its additional insured endorsements in 2004 so that they do not cover an additional insured for its sole negligence. This could be a problem if the contract contains a broad form hold harmless agreement. In the above examples, the additional insured endorsement would not cover the GC for the scaffolding accident even with the broad form agreement in place. To recover, the GC would have to make a claim for damages under the insured contract coverage.
Contractors should work closely with their attorneys to ensure that they understand the terms of hold harmless agreements. They should also consult our insurance agents to determine how their Liability insurance will apply to the agreements. The time to identify and eliminate coverage gaps is before the job starts and an accident occurs.