North Dakota’s highest court delivered a blow to Mid-Continent Casualty Company in Borsheim Builders Supply, Inc. v. Manger Insurance Co., ruling that a contract between a policyholder and general contractor fit the insured contract exception of contractual liability.
Commercial General Liability (“CGL”) policies generally exclude an insured’s contractual assumption of another party’s liability. The exclusion typically contains an exception for what is known as an “insured contract.” However, many policyholders and insurance claims personnel often miss the significance of the insured contract exception. This was the case in Borsheim.
Borsheim arose from a decision by the district court that a general contractor and the general contractor’s subcontractor were not entitled to a defense and indemnity in an underlying bodily injury lawsuit under the Mid-Continent CGL policy’s additional insured endorsement. The court found that Borsheim’s master service contract with its general contractor fell within the CGL policy’s definition of an “insured contract,” as that term was amended, because the master service contract pertained to Borsheim’s business; Borsheim assumed the tort liability of the general contractor, including its subcontractor; and the subcontractor’s tort liability to Borsheim’s injured employee was liability that would be imposed by law in the absence of any contract or agreement. Thus, the court concluded that the “contractual liability” exclusion did not apply because the insured contract exception for damages “[a]ssumed in a contract or agreement that is an ‘insured contract,’” applied in this case. Likewise, the court found that coverage would apply here, where the injured employee’s claims against the subcontractor were direct claims of tort liability.
Contractual liability exclusions and their exceptions continue to perplex policyholders, insurers and the courts. Knowing the scope of coverage that is available for contractual liability is essential for every business engaging in contractual dealings. Borsheim underscores this importance. It likewise underscores the mistakes that can occur from a lack of sufficient understanding. Policyholders would be well-served, therefore, to have their contractual agreements and their contractual liability insurance provisions reviewed by skilled insurance professionals or attorneys who can help clarify these complex provisions and ensure that the policy affords coverage in a manner that is beneficial for the insured entity.