The Clause That Turns Your Contract Into a Personal Guarantee

Every contract you sign with an indemnification clause is asking you to take on someone else's liability. Most contractors sign them without a second thought, assuming their insurance has them covered.

Here is the problem. Your general liability policy actually contains an exclusion for exactly that. And if the clause you signed does not fit the exception, you did not transfer the risk. You personally guaranteed it.

What Indemnification and Hold Harmless Clauses Actually Do

An indemnification clause is an agreement where you take responsibility for another party's losses. A hold harmless clause is the same thing under a different name. When you sign one, you become the indemnitor, promising to defend and pay for claims brought against the other party, the indemnitee.

In construction, the subcontractor typically indemnifies the general contractor and the property owner. You are assuming their liability for third-party bodily injury and property damage claims that arise from the work.

The Contractual Liability Exclusion

Here is what most contractors never learn until a claim goes sideways. The standard general liability policy contains a contractual liability exclusion. It states that the policy does not cover liability you assume under a contract.

Read that again. The very thing the general contractor is requiring you to do, assume their liability, is something your base policy excludes. On its face, that means the indemnity you signed is not backed by your insurance.

The Insured Contract Exception

There is an exception that restores coverage. The policy defines a category called an "insured contract." If your indemnity agreement fits that definition, the exclusion is lifted and coverage applies.

The standard ISO policy lists six types of insured contracts, and most typical construction hold harmless clauses qualify. The key word is most. Not all. The ones that do not fit leave you holding personal exposure.

Where It Breaks Down

There are two common ways this goes wrong.

First, some indemnity clauses ask you to cover the other party's sole negligence, meaning their fault, not yours. Those clauses often fall outside the insured contract definition, and some states will not even enforce them.

Second, some carriers modify the standard policy to strip out or narrow the insured contract coverage. If your policy has been modified that way, even a normal hold harmless clause may leave you self-insuring the indemnity. You have to actually check the policy language to know.

With available construction liability limits down roughly 60 percent over the past decade, the coverage you carry today may look very different from what you carried five years ago. That makes understanding exactly what your current policy covers more consequential than it used to be.

Three Things to Check Before You Sign

First, confirm your general liability policy includes contractual liability coverage for insured contracts, and that it has not been modified to remove it.

Second, read what the clause actually asks you to assume. If it reaches the other party's sole negligence, flag it.

Third, send the contract to your agent before you sign, not after a claim. The clause is negotiable more often than contractors think, but only before your signature is on it.

If you have a contract in front of you with an indemnification clause and you are not sure your policy actually backs what you are being asked to sign, that is worth a 15-minute conversation before you sign it.

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