300f014 Insured
Contracts and Commercial Umbrellas
A liability policy has to
restrict its coverage to handling the type of losses for which it was created
and a commercial liability umbrella (CLU) is no exception. It contains an
important provision that excludes losses involving contractual liability. In
other words, an umbrella ignores losses created by an agreement an insured
makes with other parties. Without this exclusion a CLU’s coverage would be
expanded far beyond what an insurer intended.
Example: General Cleaners Corp. (GC) is
insured by a Commercial General Liability and a CLU. It signed a multi-year
contract to clean and maintain all of the buildings owned by Suburban School
System. As part of the deal, the owner of General Cleaners agrees to be
responsible for any injury or damage that occurs while any GC employee is working
their premises. A month after signing the contract, a GC cleaning crew is
cleaning the first floor of a Suburban System high school. Unknown to the crew,
a group of kids decide to trash the computer, biology and chemistry labs on the
third floor. Suburban's property insurer pays the substantial losses and then
sues GC because of their agreeing to handle the loss per their cleaning
contract. GC turns to its insurer to defend the claim and handle any judgment.
The CLU insurer points to its contractual liability exclusion and denies
coverage as the loss did not involve an insured contract.
The policy does make two
exceptions with contracts. First, the CLU will still respond to losses
involving contractual liability when the agreement is about situations that
would be covered anyway.
Example: Playtowne Toyz specializes in play
and sports equipment for children. Playtowne is contacted by the Megaland state
school board. They want Playtowne to become the official toy and sports
equipment supplier for the entire state's public school system. As part of the
deal, Playtowne has to sign a contract. The agreement has one part that
requires Playtowne to respond to any injury caused during Playtowne making
deliveries to any of its schools, such as a Playtowne Truck striking a student.
This is a type of loss that would normally be covered by an umbrella. However,
without the exception, the situation would become a type of contractual
liability and would be excluded. The exception guarantees that a technicality
does not unintentionally reduce an umbrella's intended coverage.
Under the second exception,
the CLU insures situations that meet its definition of an "insured
contract."
While a CLU, like any other
policy, is written to control the loss exposures that it covers, it is also
designed to deal with the realities of the business world. The insured contract
exception allows coverage for many situations that companies must regularly
perform in order to run their operations such as:
In order to have a clearer
understanding of insured contracts and to get any needed coverage, be sure to
talk things over with an insurance professional.
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