Contract—the ‘b-1’ exception to the exclusion.

   In the last BLOG I said that we would discuss a recent Texas Case which gets into this whole “Contract v. Tort” situation. That will happen with the next BLOG and then we will leave this contract “thing” and go on to something else. 

  If you remember from the last BLOG—Liability policies do not cover pure contract situations. They cover torts or civil wrongs for which the insured is “legally liable” not exclusively bound by a contract. This is not new but it has been causing havoc in many parts of the country as carriers are trying to deny CGL coverage whenever the word “contract” is mentioned. This is not correct. 

  If you look at exclusion “b” you find a Contractual Exclusion! It gives back “tort liability” for bi/pd assumed by contract for injury to 3rd parties (b-2) and (b-1) “that the insured would have in the absence of the contract or agreement”. This exception is made in all liability policies including personal lines. What does it mean?

  A good example to me is Fire LEGAL Liability. 

Fire Legal is only going to apply if the insured is legally liable. An example—you lease your office space. You obviously signed a contract—-the lease. The lease states (among many things) that you must replace the property less normal wear and tear at the end of the lease. Due to your negligence you start a fire that destroys the space. This is NOT normal wear and tear. Could you be held liable for this? Yes. Could you also be contractually responsible via the terms of the lease? Yes. The landlord decides that it can be settled more quickly (or the landlord’s insurance carrier) if they sue you for breach of the lease so that is what they do. (In practice they will probably sue you for both breach of contract and negligence). Fire Legal Liability only covers you for Legal Liability so will it provide coverage? Yes! Why—-because you would have been liable (you were negligent) if they had gone that way. The problem right now is that many carriers are conveniently forgetting this very important point!

  When would you not have coverage under a liability policy? Let’s say it is a triple net lease that makes the tenant responsible for ‘normal’ perils regardless of cause (just like the tenant owned the building). Lighting causes a fire that destroys the building. Fire Legal would never cover this because you would never be  'legally liable’ for this. When “fault” is not relevant you write a property policy! We do this all the time when we cover property of others under property contracts.