The Rack Collapse, the Indemnity Clause, and the Umbrella's SIR
Northstar Fabrication, Inc. manufactures steel racks and has a commercial general liability policy with a $1,000,000 per-occurrence limit, a $2,000,000 general aggregate, and a $1,000,000 products-completed operations aggregate. It also has a $1,000,000 business auto policy, a $1,000,000 employers liability policy, and a $10,000,000 commercial umbrella. The umbrella has a $25,000 self-insured retention for claims not covered by scheduled underlying insurance and follows form with the CGL. Northstar signs a contract with a big-box retailer requiring Northstar to indemnify the retailer for any injury caused by Northstar's racks and to carry a $10,000,000 umbrella. A rack collapses in a retail store, injuring a customer. The customer sues both the retailer and Northstar. The CGL pays its $1,000,000 limit. The retailer demands that Northstar defend and indemnify it. Northstar's CGL has a contractual liability exclusion with the usual insured-contract exception, but the contract's indemnity clause is broader than the exception.
1. Does the umbrella respond to the $1,000,000 paid by the CGL?
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Yes. The CGL is a scheduled underlying policy, and the umbrella follows form. For Northstar's own liability, the umbrella responds above the CGL's $1,000,000 per-occurrence limit, up to the $10,000,000 umbrella limit. The umbrella does not pay the CGL's deductible or the $25,000 self-insured retention for claims covered by scheduled underlying insurance. The SIR applies only to claims not covered by scheduled underlying insurance. The umbrella's defense obligation may attach after the underlying limit is exhausted, depending on the umbrella's defense provisions.
2. Does the umbrella cover the contractual indemnity owed to the retailer?
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The contractual indemnity is the harder issue. The CGL's contractual liability exclusion bars liability assumed under contract unless the contract is an insured contract. The usual insured-contract exception does not cover an indemnity that makes Northstar responsible for the retailer's own negligence. If the umbrella follows form, it inherits that exclusion and does not cover the indemnity. If the umbrella has broader contractual liability wording, it may respond, but only subject to the $25,000 SIR and only after the CGL and any other underlying insurance are exhausted. The retailer's demand does not itself create coverage. The agent should compare the contract's indemnity wording to the policy's insured-contract definition before promising coverage.
3. How does the self-insured retention work if the indemnity claim is not covered by the CGL?
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The $25,000 SIR is not a deductible that the umbrella pays; Northstar must pay the SIR out of pocket for a claim not covered by scheduled underlying insurance. The umbrella's defense obligation may attach only after the SIR is exhausted. If the claim is excluded by both the CGL and the umbrella, the SIR never comes into play because there is no coverage. Northstar should also check whether the retailer is an additional insured on Northstar's CGL. If the retailer is not an additional insured, the retailer's own insurer may pursue Northstar and the contractual indemnity may be the only route to coverage. The agent should document the gap and recommend that future contracts use indemnity wording that fits the insured-contract definition.