Vicarious liability is created when one person or entity is or can be held legally liable for the results of another person's or entity's actions. Such indirect liability can arise out of a relationship (parent/child, employer/employee, etc.), position or contract. Also required is the right, ability or duty to control the actions of the directly liable party. Without the opportunity or responsibility to control another's actions there can be no vicarious liability. Owners and general contractors hold a position with a certain amount of control over and responsibility for the actions of lower tier contractors. That control leaves them vulnerable to being held vicariously liable for the actions of these lower-level entities in addition to their liability for their own actions. Avoidance of, or the attempted avoidance of, the financial consequences that can result from being held vicariously liable for the actions or inactions of another is an understandable and acceptable reason for the use of contractual risk transfer. Indemnity and waiver of subrogation agreements, which constitute contractual risk transfer (as discussed in the last post), are or should be the upper tier contractor's attempt to avoid or lessen the vicarious liability exposure created by lower tier contractors. Questions of contract enforceability arise when the upper tier contractor attempts to contractually exculpate themselves from liability for their sole actions. Contractual risk transfer is wholly separate from the contractual requirements to purchase or provide insurance protection. Upper tier contractors become so focused on enforcing contractual insurance requirements that they ignore the breadth of contractually assumed risk already taken on in the lower tier contractor's CGL. Transferors (upper tier contractors) should concern themselves more with the basic CGL than the endorsements they so fervently pursue. This article describes the protection extended to an indemnitee by the unendorsed CGL. Part three of this series details the protection available to additional insureds added using the CG 20 10. For sake of reference, the 12 07 version of the basic CGL and the 07 04 edition of the 20 10 is used in the following discussions. Automatic Contractually Accepted Risk Three parts of the unendorsed commercial general liability (CGL) policy define the protection and coverage limits extended to transferors (indemnitees): 1) the exception to the Contractual Liability exclusion; 2) the definition of "insured contract;" and 3) the Supplementary Payments section of the policy. The exception gives coverage, the definition defines or limits coverage and the supplementary payments provisions may act to expand the limits of coverage available to indemnitees. Notice that the overall breadth of protection extended by the CGL to contractual indemnitees hangs on the definition of "insured contract." Exception to the Contractual Liability Exclusion ("2.b."). There are two exceptions to the contractual liability exclusion, but only one involves contractually accepted liability. Exception (2) describes the parameters by which contractual liability is covered in the CGL; protection is provided when:

• The liability is assumed by an "insured contract;"
• The bodily injury or property damage occurs AFTER the execution of the contract;
• Defense and other fees are assumed in the contract (indemnify and hold harmless wording required); and
• A suit alleges injury or damage covered by the policy.

Defense costs and any other fees relating to the indemnitee are within the limits of coverage not in addition to available limits (lowering the available limits). Provisions within the supplementary payments section can serve to negate this limitation. Definition of "Insured Contract." Subpart "f." of the unaltered CGL's definition of "insured contract," extends liability coverage to contractual indemnitees when required by contract; but only for the transferor's tort liability. A tort in this context is a negligent act leading to charges of bodily injury or property damage. Again, the indemnitee is only covered for action covered by the policy. In essence, if the named insured would be covered by the policy, so would the indemnitee. Notice that the definition does not limit the level of risk transfer accepted (the levels of risk transfer are contained in the prior post); it simply states, "That part of any other contract or agreement pertaining to your business…under which you assume the tort liability of another party to pay for 'bodily injury' or 'property damage' to a third person or organization." The level of transfer could only be limited by statute when the unendorsed wording is in use. Insurers routinely alter the definition of "insured contract" by use of one of two available endorsements:

1. Contractual Liability Limitation (CG 21 39); or
2. Amendment of Insured Contract (CG 24 26).

The CG 21 39 should be avoided when possible. This endorsement removes "f." from the definition of "insured contract" thus removing ALL protection normally extended to indemnitees. Allowing this endorsement's attachment can lead to the insured lower tier contractor's breach of contract under the construction contract's indemnification agreement, especially in the absence of other endorsements (i.e. additional insured endorsements). Essentially, the Amendment of Insured Contract endorsement redefines the meaning of "insured contract" to match the coverage granted to the Additional Insured in the CG 20 10. By adding the phrase, "…provided the 'bodily injury' or 'property damage' is caused, in whole or in part, by you or by those acting on your behalf," the CG 24 26 mimics the additional insured wording. Such phraseology excludes the possibility of the indemnitor's assumption of the indemnitee's sole negligence; the named insured must somehow be directly or vicariously liable for the actions, either individually or in contribution with another party. Of the two "insured contract" definition-altering endorsements, the CG 24 26 is obviously preferred. However, if the CGL can be written without either endorsement, the broadest coverage is extended to the indemnitee. Extending completed operations protection to the upper tier contractor to protect it against vicarious liability for injury or damage caused by the inferior work of the lower tier contactor can be the source of long debates with underwriters and the upper tier contractor's risk management department. Some contracts continue to request the 11 85 version of the CG 20 10 or its equivalent. Well, there is no equivalent, even when the CG 20 37 is attached. Most of these conversations, debates and hassles can be avoided if the definition of "insured contract" remains unaltered. Notice again the wording of "f." as presented above. All that is required is that the "you" (the named insured) assume the tort liability of one party to pay an injured third party. If the contract specifically states that the lower tier contractor is to indemnify and hold the upper tier contractor harmless against liability for bodily injury or property damage arising out of the structure once it has been put to its intended use, then the exception to the exclusion and the definition of "insured contract" combine to extend completed operations coverage to the indemnitee (upper tier contractor). As stated, such coverage hinges on the definition of insured contract; all the more reason for agents to avoid any redefining endorsement. The insured meets his contractual requirement as long as coverage is in force and the definition is not altered. If the definition is altered at renewal, such could be considered a material change to coverage requiring the carrier to notify the insured and the agent to discuss the change with the insured. Supplementary Payments All coverage for contractually assumed liability extended from the unendorsed CGL is provided by the exception to the contractual liability exclusion and the definition of "insured contract." However, the supplementary payments section addresses the issue of limits available for the defense and protection of the indemnitee. If several conditions are met, defense costs and fees associated with the defense of the indemnitee are in addition to the limit rather than included within the limit of coverage, thus avoiding the reduction in limits discussed above. Defense for the indemnitee (transferor) is in ADDITION to the limits of coverage if the following conditions are met:

• The BI or PD suit names BOTH the insured and the indemnitee as defendants;
• The suit seeks damages assumed by the insured in an "insured contract;"
• The liability policy applies to the damage;
• The liability for such defense and other costs are assumed in the contract;
• There is no conflict of interest between the insured and the indemnitee;
• The indemnitee agrees to let the insurer control the defense and choice of counsel; and
• The indemnitee fully cooperates with the insurer (a long list of things).

Lack any of these requirements at any point in the process and the cost to defend the indemnitee returns to being paid as part of the coverage limits. To Be Continued "Indemnitees" are extended broad protection by the unaltered CGL, provided specific requirements are met. The next post in this series compares that automatically provided protection with the coverage extended to endorsed additional insureds by the CG 20 10 07 04.