Contractual liability is a widely used, yet frequently misunderstood, aspect of risk management and commercial insurance. Companies commonly enter into contracts that include promises, warranties, or duties while they conduct business. These contracts sometimes include ‘hold harmless’ or indemnity terms in which one party agrees to take the risk of loss or damage that would otherwise be carried by another party. Furthermore, we will explain. Contractual Liability Insurance Policy, coverage, cost, and how it work.
Contractual Liability Insurance
This insurance protects small business owners from contract-related disputes. A company’s liability exposure increases when its owner commits to a contract. Contractual obligation describes this situation.
Let’s imagine a general contractor hires your landscaping company to help out at a customer’s house. The general contractor and your company have agreed on terms. Your business will now be financially responsible for claims, thanks to the agreement. This is why having contractual liability insurance is critical. Without it, you would have to pay for your own claims.
You can supplement your standard liability insurance with contractual liability protection.
How Does Contractual Liability Insurance Work
Contractual liability insurance is frequently required when two parties enter into a contract to do specific work. How does contractual liability insurance work? It works when the company committing to execute a service or fulfill another obligation accepts financial responsibility for any damages, including personal injury and property damage, that may occur during the course of its activities, holding the contractor harmless.
A “hold harmless” clause, also known as an indemnity agreement, is a legal clause that is widely used in contracts to shift obligations from one party to another. For example, a city may employ a construction company to complete an infrastructure project, and the contract may include a hold harmless clause.
In this situation, the construction company accepts financial responsibility and undertakes not to hold the city liable for it. This could include being held accountable for third-party injuries on the construction site or property damage to a nearby private structure.
The building company would then obtain contractual liability insurance to help cover these potential financial losses.
A commercial general liability policy frequently has restrictions or doesn’t cover contractual liability insurance at all. To fully protect a business’s financial responsibility as set out in a contract, it must buy an extra endorsement. There are two kinds of endorsements:
Standard contractual liability is when the company specifies which contracts it wants to be covered.
Blanket contractual liability occurs when a company has coverage for all of its contracts. This endorsement costs more than a typical endorsement.
Businesses that rent buildings may also utilize contractual liability insurance because their contracts may hold the building owner responsible for any claims arising from the business’s usage of the premises.
Read Also: Contractual Liability Insurance: Protect Your Business from Contractual Risks
Contractual Liability Insurance Policy
Contractual liability coverage is typically included in standard GL policies. These policies often cover “liability assumed under an ‘insured contract'” and “bodily injury” or “property damage” for which the insured becomes legally compelled to pay as a result of an “occurrence.”
An “insured contract” is generally defined in a policy as any agreement connected to the insured’s business in which they assume the tort responsibility of another party to pay for “bodily injury” or “property damage” to a third party.
It is vital to understand that a GL policy does not cover all contractual liabilities. Contracts including quality assurances, commercial performance, or financial commitments, for example, are normally outside the scope of a GL policy.
Is Contractual Liability Covered in a General Liability Policy?
Though business general liability insurance does cover some types of contractual liability, it does not cover all risks.
When a customer gets hurt or their property gets damaged, general liability covers the business risk. This includes the cost of a lawyer, compensation, and court orders. Your insurance will cover third-party claims for injuries and property damage, even if you are responsible because of a lease or contract that has an indemnity or hold harmless clause.
One example is that business leases usually need general liability coverage. If a customer gets hurt on a business property, you might sign a lease that protects the lessor from that. When you do this, your business takes on the landlord’s responsibility. If a customer gets hurt, your general liability protection already covers that. This means that you are still protected against those risks.
Your general liability coverage, on the other hand, would not cover you if a customer sued you for breach of contract or because your work was late, wrong, or never delivered. To do this, you would need professional liability insurance, which is also called mistakes and omissions insurance (E&O).
Read Also: General Liability Insurance Utah: The Complete Guide
Contractual Liability Claims Scenarios
A construction company and a property owner engage in an agreement to construct a commercial property. A keep harmless clause in the contract requires the construction company to indemnify the property owner if a third party is hurt during construction. A third party sues the property owner after an accident happens. The GL policy of the building company would most likely respond to this claim under its contractual responsibility coverage.
Lease Agreement: A store rents a building for its shop. A condition in the leasing agreement states that the shop shall be held liable for any customer accidents that occur on the premises. When a customer slips and falls in the store, she sues the store owner. Given the indemnification language in the lease agreement, the retailer’s GL policy may respond to cover the case.
Maintenance Contract: A landscaping company undertakes to maintain the grounds of a corporate complex and accepts responsibility for any damages caused by its services. They accidentally damage a parked car while working, and the car owner sues the complex owner. The contractual duty provision of the landscaper’s GL policy will certainly apply to this claim.
Contractual Liability Examples
Here are some examples of contractual liability:
- Indemnification Clauses: Indemnification clauses are common in contracts, and they compel one party to compensate the other for losses, damages, or legal expenditures incurred as a result of specific defined events or actions. A party may be financially responsible for failing to fulfill indemnity obligations.
- Performance Guarantees: Many contracts have performance guarantees or warranties, in which one party promises to meet certain deadlines, do certain work, or do it well. The party may have to pay the other party for its financial losses if it doesn’t keep these promises.
- Leases and rent agreements: In business leases, tenants may be legally responsible for any damage to property, injuries to people, or other problems that happen on the property they are leasing..
- Construction contracts: Generally speaking, construction contracts come with a variety of obligations, including delays in project completion, poor performance, property damage, and personal injury. If the building business fails to fulfill its contractual commitments, it may be held accountable for any resulting losses.
- Service Contracts: If service providers fail to satisfy service levels, quality standards, or deadlines, they may be accountable. This can lead to financial losses or legal problems.
- Non-Disclosure Agreements (NDAs): NDAs require parties to agree to keep certain information private. If one party breaks the duty of secrecy, they may be responsible for any losses that happen.
- Product Supply Agreements: A supplier may be held contractually accountable if they fail to provide products as defined in the supply agreement, resulting in financial losses or disruptions for the customer.
Contractual Liability Insurance Coverage
Contractual liability insurance covers claims arising from contract disputes. It protects the liability that a business owner assumes as a result of a contract.
Contractual liability coverage is critical for companies that often deal with contracts, such as contractors. Construction contracts are one of the reasons why contractor insurance is so crucial.
Assume a general contractor enters into a construction contract with a property owner. The contract says that the general contractor is responsible for any claims of injury or property loss that happen on the job site while the work takes place. Hold harmless occurs when the insured assumes financial risk from another party, as described in this case.
Contractual liability coverage can help more than simply construction enterprises. If your company leases office space, you have most certainly signed a lease agreement. These contracts often oblige business owners to indemnify the building owner in the event of a loss.
What Does Contractual Liability Insurance Not Cover?
Here are some frequent exclusions in a policy for contractual liability insurance:
- Prior Knowledge Exclusion: If the insured knew about a liability or should have known about it before the policy started or the contract was signed, the policy may not cover it.
- Intentional Breach of Contract: In most cases, contractual liability insurance does not cover intentional breaches of contract by the insured party. Its purpose is to protect against actions that occur accidentally or without thinking.
- Assumed Liability Beyond Contractual Obligations: The policy may not cover liabilities that extend beyond the covered contracts’ express terms.
- Intellectual Property Claims: Some contract liability insurance may not cover claims or disputes of intellectual property infringement that come from patent, copyright, or trademark violations.
- Employee Injuries or Workers’ Compensation: Because they receive coverage by separate workers’ compensation insurance, claims for injuries to employees or workers’ compensation frequently lack coverage by contractual liability insurance.
- Professional Liability: Professional liability claims may be excluded from contractual liability insurance coverage if the insured party delivers professional services. You may also need professional liability protection.
- Contractual Exclusions: The policy may specify specific exclusions for certain types of contracts or sectors. Contracts involving hazardous activities or high-risk operations, for example, may include exclusions unique to those activities.
- Bodily Injury or Property Damage: Contractual liability insurance may not be able to cover claims for bodily injury or property damage that fall outside of the contractual obligations and liabilities.
Read Also: General Contractor Insurance: Coverage, Cost & More
Contractual Liability Insurance Cost
Contractual liability insurance for small business owners costs an average of $42 per month, or around $500 per year.
There are a number of things that affect how much general liability insurance, which includes contractual responsibility, costs:
- Location
- Size of your business
- Policy limits
- Claims history
What Is a Contract Liability Also Known As?
If someone signs a negotiable instrument but doesn’t put their signature on it, that person is not legally responsible under the rules of the contract. This refers to signature liability. Contract law terms for when someone is responsible for something in a contract.
What Are the Types of Liability Contract?
There are two various types of liability: contractual liability, which derives from a contract, and extra-contractual liability, which originates from a person’s deeds and actions (or omissions).
What Are the Two Primary Methods of Contract Liability?
Primary liability and secondary liability are the two categories of responsibility that might arise. Makers of notes and drawees of drafts (the bank is the drawee for your check) are the primary accountable parties, and their obligation is absolute. The third parties are the drawers and endorsers.
What Is Blanket Contractual Liability?
“Blanket contractual liability coverage” means insurance that covers all of the risks that the worker agrees to take on in the contract. This type of insurance protects the contractor in the event of loss or damage, even if the contractor was not culpable for causing it.
What Is Contractual Assumption of Liability?
The liability assumed by the party insured under contract means liability incurred when one pledge to indemnify or hold blameless another, not liability resulting from a breach of contract.
What Are the Two Types of Liabilities Contract and Warranty?
Contract liability and warranty liability can both apply to people who trade in commercial paper. A party’s signature on a contract makes them legally responsible for its terms. Primary parties and secondary parties are two types of contract signers with respect to liability.
What Is the Cross Liability Clause in Insurance?
For those who gain from a policy with a cross-liability clause, it is as if they each had their own policy. The cross-liability provision has no impact on coverage limits because they vary from insured to insured. This provision permits one protected party to file a suit against another.
References
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