Contractual liability insurance is an important type of insurance for businesses of all sizes. Many businesses enter into contracts with other businesses, customers, and vendors on a regular basis. These contracts can expose businesses to a variety of risks, including:
- Claims that the business failed to perform its obligations under the contract
- Claims that the business’s products or services did not meet the contract’s specifications
- Claims that the business was negligent in performing its obligations under the contract
Contractual liability insurance can help protect businesses from the financial costs of defending against these claims, as well as any settlements or judgments that may be awarded.
In this blog post, we will discuss everything you need to know about contractual liability insurance, including:
- What is contractual liability insurance?
- Who needs contractual liability insurance?
- What does contractual liability insurance cover?
- How much does contractual liability insurance cost?
- How to choose the right contractual liability insurance policy
We will also provide some tips for managing contractual liability risk.
If you are a business owner, we encourage you to learn more about contractual liability insurance. It is an important type of insurance that can protect your business from the financial costs of contractual claims.
What is Contractual Liability Insurance?
A contractual liability insurance policy (CLIP) protects your company against the financial dangers that come with signing a contract.
Any contract you sign may include financial and legal requirements, such as a leasing agreement stating that you are liable for litigation resulting from consumer injuries at your retail store.
A contractual liability agreement is frequently referred to as a “hold harmless agreement.” It shows that you agree to take on liability and financial responsibilities on behalf of the person with whom you entered into a contract, with the goal of ultimately protecting them from liability claims and financial loss.
What Does Contractual Liability Insurance Cover?
Contractual liability insurance protects you against the responsibilities you accept when you sign a lease or other sort of contract. This could entail accepting responsibility for:
#1. Third-party bodily injury
Commercial landlords generally need their tenants to sign a contractual liability agreement. This shifts responsibility for client incidents from the landlord to the business using the premises.
For example, if a consumer sues your business for a slip-and-fall accident, the contractual liability you have with your landlord requires your company to pay for any physical harm or other tort liability.
#2. Property damage caused by a third party
Construction contracts signed by the building and construction industries frequently include contractual liability provisions. A general contractor, for example, may have a contractual liability agreement with the customer and be accountable for specific claims and risks associated with a project, such as property damage liability.
The general contractor may also have liability agreements with subcontractors that cover their work on the job.
Contractual liability insurance protects you against the responsibilities you accept when you sign a lease or other sort of contract.
What Does Contractual Liability Coverage Not Cover?
Keep in mind that this coverage has contractual liability exclusions.
Contractual liability insurance does not cover lawsuits or claims brought against your company for failing to meet contractual obligations, such as a customer suing you for a delayed or incomplete project.
Contracts that are incomplete or unsigned by both parties are likewise not covered.
Who Needs Contractual Liability Insurance?
At some point, most contractors and building organizations will require contractual liability insurance. Many other small and big enterprises engaged in contract-related activity, whether privately or for the government, may also require this type of coverage.
As was already said, most contracts with an indemnity clause or language that does not hold one party responsible will usually need contractual liability insurance to cover the higher cost of a claim.
Why Do You Need Contractual Liability Insurance?
Any company that works on a contractual basis with another company should consider purchasing contractual liability insurance. It provides additional security for you and your business beyond general liability insurance.
When working directly for a homeowner or business, a commercial general liability policy protects you. It assists you in paying fees if you are held liable for injuring someone (bodily injury) or causing property damage.
For example, if a homeowner hires you to make a plumbing repair and you bust a pipe, causing damage to the homeowner’s furnishings, your general liability coverage would most likely kick in and cover the cost.
Most general liability insurance, however, will exclude coverage when you perform contract work for a third party, especially if the contract includes a hold harmless clause. If your contract includes a keep harmless clause, your general liability coverage may no longer protect you.
What are the Contractual Liability Riders?
“Wait!” you may be thinking. I have to purchase an entirely new policy if I want to be protected for contract work.”
Not always; you may only need to add a rider.
Riders, often known as endorsements in the insurance industry, are adjustments or additions to an insurance policy. You’ve undoubtedly heard of some of these:
- A rider on your auto policy is when you acquire auto insurance and your insurer offers 24/7 roadside assistance for a modest price.
- If you reside in an earthquake- or hurricane-prone area, you may have added disaster riders to your home policy.
Similarly, you can supplement your general liability policy with a contractual liability rider. These riders are available in two types:
- Blanket rider: A blanket rider applies to all contracts you enter into. Any new contracts you sign instantly protect you. While this is extremely easy, it can also be costly, which is why there is a:
- Standard contractual liability rider: A conventional contractual liability rider requires you to name every contract that you wish the endorsement to cover. This rider is less expensive than blanket coverage and is an excellent option if you only undertake contract work for a small number of clients. The obvious disadvantage of this form of rider is that if you fail to add a contract to the policy, you will not be covered for it.
The bottom line is that you need to know when you’re covered and what you’re protected for when it comes to small business insurance.
If you enter into a contract that includes a keep harmless clause, the insurance you have may not apply. That’s when contract liability insurance or contract liability riders might help keep your company going forward.
What Is an Indemnity Agreement, Also Known as a ‘Hold Harmless’ Clause?
A contract indemnity agreement is sometimes known as a “hold harmless clause” or “hold harmless agreement.” If you sign a contract with another party and agree to a hold harmless clause, your company accepts responsibility for any losses or claims.
So, if there is a bodily injury or property damage claim, it is your company’s responsibility to cover it, not the other party’s.
Contractual Liability Endorsements: What Are They?
Endorsements are modifications to an insurance policy. Keep in mind that a commercial general liability insurance (CGL) policy often excludes risks that you assume when entering into contracts with another party. A contractual liability endorsement would be required to cover this type of loss.
#1. Standard Contractual Liability Endorsement
A standard contractual liability endorsement is a CGL policy add-on. You must specify the contracts that you want the endorsement to cover.
#2. Contractual Liability in General Endorsement
Because a blanket contractual liability endorsement includes all contracts, it is usually more expensive. This means you won’t have to name the specific contracts for which you want coverage, as you would with a typical endorsement.
Contractual Liability Insurance Exclusions and Limitations
Be aware that there are contractual restrictions and limitations on liability. This means that your contractual liability coverage will not cover all types of claims.
Incomplete Contracts
Contract liability insurance won’t cover incomplete contracts. It will also not help you if your company fails to meet the conditions of the agreement.
For instance, if your company committed to catering a client’s party but did not send enough food, you could be sued. Contractual liability insurance will not be of any use to you in this situation.
Coverage Limits
Contractual liability insurance has coverage limits, like other types of insurance. That is why it is critical that you obtain adequate coverage for your company.
What Effect Do Easements Have on Contractual Liability?
With easements on your business property and the risk transfer involved, contractual liability might also be a problem.
Easements are “insured contracts,” unless they include building or demolition within 50 feet of a railroad line.
If your local municipality has an easement to maintain water and sewer lines that cross your land, the municipality assumes liability for any work done on your property to service those lines.
In other words, if your municipality built a massive pit on your property to gain access to a water main, it would be liable for any liabilities that resulted.
This is comparable to the elevator maintenance agreements that landlords enter into with contractors. In an elevator shaft easement, the contractor indemnifies the owner against litigation arising from elevator maintenance and operation. This indicates that the contractor takes all risks associated with elevator operation.
Is a General Liability Policy Going to Cover Contractual Liability?
Commercial general liability insurance covers some types of contractual liability, but it does not cover all risks.
General liability insurance covers business risks such as customer injuries and property damage. This includes the expenditures of legal defense, settlements, and judgments.
Your policy will cover third-party claims for injuries and property damage, including those arising from a lease or contract, including an indemnification or hold harmless clause.
General liability coverage, for example, is often required for commercial leases. As a lessee, you may sign a lease for a commercial property that protects the lessor from consumer accidents. As a result, your company assumes liability for the landlord.
Because your general liability policy already covers customer injuries, you would still be covered for those risks as a general liability policyholder.
Your general liability policy, on the other hand, would not cover you if a customer sued you for breach of contract or if your work was late, inaccurate, or never delivered. A professional liability policy, commonly known as errors and omissions insurance (E&O), would be required for this.
What is the Cost of Contractual Liability Insurance?
For small business owners, the average cost of contractual liability insurance is $42 per month or around $500 per year.
There are a number of variables that affect the price of general liability insurance, including contractual liability, including:
- Location
- Your company’s size
- Policy constraints
- Histories of Claims
Conclusion
In a nutshell, contractual liability insurance protects you against liabilities you may incur as a policyholder while purchasing or contemplating purchasing a contract. Many insurance companies have a general liability policy that protects them against numerous hazards that they may face in their daily operations; nevertheless, these policies may exclude coverage in certain instances.
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