By Donald S. Malecki

One of the more common exclusions being applied to commercial general liability policies today is the contractual liability limitation endorsement. It is not a total exclusion; but considering its impact, it should be considered such for some businesses.

The basic provisions of the CGL policy include bodily injury and property damage coverage for assumptions of liability under a variety of business-related indemnity agreements, whether written or oral. With this coverage provided on an automatic basis, the named insured does not have to send the contracts involved to the agent or broker each time he or she enters into an agreement.

When standard ISO Contractual Liability Limitation Endorsement CG 21 39 is attached to the policy, it has the effect of eliminating coverage for the liability assumed under most business-related indemnity agreements. What remains covered, after this endorsement is attached, is liability for bodily injury or property damage for which the insured is obligated to pay damages by reason of the assumption of liability dealing with:

* A contract for a lease of premises.

* A sidetrack agreement.

* An easement or license, except in connection with construction or demolition operations on or within 50 feet of a railroad.

* An obligation required by ordinance to indemnify a municipality. An example is a business owner or operator who wants to place a dumpster on public property adjoining the business and agrees to hold harmless a municipality for any injury associated with the placement or use of the dumpster.

* An elevator maintenance agreement.

Omitted from this coverage grant is the most important coverage of all for liability assumed--that involving the tort liability of others.

Considering that many businesses rent or lease real property, often encounter requirements of municipalities in conducting business, and become involved in license agreements more often than one might think, the contractual liability coverage that is provided by exception under the limitation endorsement could be viewed by some as being better than nothing.

However, considering (1) that almost every business transaction is contractual in nature, and (2) how common it is today for businesses to enter into contractual agreements where they agree to assume the tort liability of another, some coverage undoubtedly will fall between the cracks when the contractual limitation endorsement applies. It is a scary thought, but one which businesses do not know about until after something happens.

It is said that this contractual liability limitation endorsement is an underwriting tool. It is probably true that it was devised for underwriters who do not want to provide coverage in certain isolated circumstances. But this endorsement should not be issued carte blanche.

Just recently, a review of a large processing plant's CGL policy revealed the presence of this contractual liability limitation endorsement. When it was called to the producer's attention, he did not understand the endorsement's significance. If he does not know what impact this limitation endorsement could have on his client, he cannot reasonably expect his staff to be able to catch the problems before it wreaks havoc on his client.

Compounding the problem is the fact that many businesses subject to this contractual limitation endorsement also purchase an excess or umbrella liability policy.

An excess liability policy is only as good as the primary layer, since its sole purpose is to provide excess limits. An excess policy is recommended whenever the insured feels satisfied about the coverage being provided by his or her insurance portfolio.

When a CGL policy is modified with this contractual limitation endorsement, and the insured understands the significance, he or she will not be satisfied. An excess liability policy also is not recommended, since the claim or suit alleging contractual assumption of another's tort liability involving bodily injury or property damage will not be covered by the primary layer and thus the excess layer will be not triggered!

An umbrella liability policy, on the other hand, is intended to provide broader coverage than is otherwise available under the primary layer and is intended to drop down above a self-insured retention if the scheduled underlying policy does not apply. However, the problem is that it is becoming increasingly difficult to provide examples of where an umbrella is broader than underlying.

An umbrella policy may apply in the absence of underlying liability coverage for the insured's contractual assumption of another's tort liability where the primary CGL policy is endorsed with the contractual liability limitation endorsement. However, even then, if the umbrella policy is subject to a self-insured retention, it is going to get the insured's attention because activating the umbrella policy will require an out-of-pocket expense equivalent to that self-insured retention.

The word may is emphasized above because not all umbrella policies can be counted on to provide contractual liability coverage in cases where contractual liability coverage of the primary CGL policy is more limited in scope. It is well known in the insurance and risk management industry that umbrella policies can be "tricky."

An example of one such provision of an umbrella policy is one that might state that as far as coverage for liability assumed is concerned, the policy provides no broader coverage than that provided by the scheduled underlying liability policy. Translated, this means big trouble for the entity that needs contractual liability coverage for its assumption of another's tort liability, since nothing can activate the coverage required.

Today, more than ever, it is a requirement that the insurer writing the primary liability coverage also provide the umbrella policy. In these circumstances, one would think that the umbrella policy would likely have fewer pitfalls because the same underwriter (or, at least, two different underwriters of the same insurer) might handle both policies.

However, that assumption should be erased from the minds of agents and brokers! There can be very significant differences in coverage between primary and umbrella policies of the same insurer. The point is that agents and brokers need to pass the word that use of contractual liability limitation endorsements should be kept to a minimum--because they can create havoc among insureds and the repercussions can be far-reaching. *