Short answer
Contractual liability coverage is the part of your general liability policy that pays when you have agreed in a contract to take on someone else’s liability, such as an operator’s, for bodily injury or property damage. The standard GL form excludes liability assumed by contract, then gives it back for an "insured contract," which includes the part of any business contract where you assume another party’s tort liability.
- That is the coverage that backs the indemnity in your MSA. In Texas, Chapter 127 often makes that indemnity enforceable only if it is supported by insurance.
- Two limits to watch: the coverage only applies to injury that happens after the contract is signed, and some policies narrow the definition with endorsements like CG 24 26.
How the standard GL form handles contracts
IRMI defines contractual liability, in insurance use, as "the assumption of the other contracting party's liability under specified conditions," not all liability that comes from a contract.
The standard ISO form, CG 00 01, starts with an exclusion. Coverage A does not apply to bodily injury or property damage "for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." Then it carves two exceptions:
- Liability you "would have in the absence of the contract or agreement," and
- Liability "assumed in a contract or agreement that is an 'insured contract'," provided the injury or damage "occurs subsequent to the execution of the contract or agreement."
The definition of "insured contract" includes leases, sidetrack agreements and a few others, and then the one that matters for oilfield work: "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." Tort liability means "a liability that would be imposed by law in the absence of any contract or agreement."
Why it matters so much in knock-for-knock
In a typical knock-for-knock MSA, you agree to defend and indemnify the operator group if one of your employees is hurt, even if the operator was negligent. If your employee sues the operator and the operator tenders the claim to you, that is liability you assumed by contract.
Two parts of CG 00 01 work together here:
- The employer's liability exclusion removes injury to your own employees from the GL, but it says it "does not apply to liability assumed by the insured under an 'insured contract'."
- The insured contract exception to the contractual liability exclusion brings that assumed liability back in.
So your GL can respond when you owe the operator indemnity for your own employee's injury, subject to the policy's other terms. Chapter 127 adds the Texas layer: under Section 127.005, that indemnity is generally enforceable only if the parties agreed in writing that it is supported by insurance, and only to the extent of the coverage agreed. See the Texas oilfield anti-indemnity act.
Knock-for-knock allocation
Defense costs for the operator
Indemnity in an MSA usually includes defending the operator, not just paying a judgment. CG 00 01 addresses this two ways:
- For liability assumed in an insured contract, reasonable attorneys' fees and litigation expenses incurred for a party other than an insured are treated as damages, if you also assumed that party's defense costs in the same insured contract. Paid this way, they reduce your limits.
- Under Supplementary Payments, the insurer will defend your indemnitee outside the limits if a list of conditions is met: the suit names both of you, you assumed the indemnitee's defense in the same insured contract, no conflict of interest appears, the indemnitee agrees to the insurer controlling the defense with the same counsel, and the indemnitee agrees in writing to cooperate.
Which path applies changes how much of your limit is left for everything else.
Where the coverage can come up short
The CG 24 26 problem deserves a closer look. Knock-for-knock indemnity is usually written "regardless of fault." If the operator is entirely at fault for your employee's injury, a CG 24 26 definition, which requires that the injury be caused at least in part by you, may not treat that piece of the indemnity as an insured contract. Your agent should check for it before you sign a knock-for-knock MSA.
| Gap | Where it comes from | What to check |
|---|---|---|
| Injury before the MSA was signed | Insured contract exception requires injury after execution of the contract | MSA signed before the first job |
| Narrowed definition | ISO CG 24 26 limits paragraph f. to injury or damage caused "in whole or in part, by you or by those acting on your behalf" | Look for CG 24 26 or similar on your policy |
| Liability the statute will not enforce | Insured contract counts only to the extent permitted by law (CG 24 26 wording) | How Chapter 127 treats the indemnity |
| Pollution | GL pollution exclusions still apply; Chapter 127 does not cover pollution property damage | Separate pollution coverage |
| Limits short of the MSA | GL limits cap what is paid | Umbrella following the GL |
Common questions
Do I need to buy contractual liability coverage separately?
On the standard ISO form, coverage for liability assumed in an insured contract is built in. The question is whether endorsements on your policy have narrowed it.
Is contractual liability the same as being an additional insured?
No. Contractual liability covers you for the indemnity you promised. Additional insured status puts the operator directly on your policy. MSAs usually require both. See indemnity vs additional insured.
Does my auto policy have contractual liability coverage?
Auto policies have their own insured contract provisions. Check your auto form separately, because GL wording does not carry over.
What if the indemnity is void under Chapter 127?
If the law will not enforce it, your insurer generally has no assumed liability to pay. Section 127.006 says the chapter does not affect the validity of insurance contracts, so additional insured coverage may still apply on its own terms.
Sources
- ISO CG 00 01 04 13, Commercial General Liability Coverage Form (sample copy published by Sonoma County). Contractual liability exclusion and exceptions, employer’s liability exclusion exception, insured contract definition, supplementary payments for indemnitee defense.
- ISO CG 24 26 04 13, Amendment of Insured Contract Definition (copy published by New York OGS). Narrows paragraph f. to injury caused in whole or in part by the named insured, and only to the extent permitted by law.
- IRMI glossary: contractual liability. Insurance meaning of contractual liability as assumption of another party’s liability.
- IRMI glossary: insured contract. Insured contract as an exception to the contractually assumed liability exclusion.
- Texas Civil Practice and Remedies Code, Chapter 127. Insurance-supported indemnity (127.005); pollution exclusion (127.004); insurance contracts unaffected (127.006).
This page explains insurance, not law. Have your attorney review indemnity and contract language; our job is making the insurance match it.
Keep reading
Contract requirements
What does knock-for-knock mean in my MSA, and what insurance does it take?
Contract requirements
What does the Texas Oilfield Anti-Indemnity Act mean for my MSA and my insurance?
Questions
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Questions
What is the difference between indemnity and additional insured?
Coverage
How much umbrella do operators want, and why does my certificate keep failing on it?