Contractual Liability Insurance

Contractual liability insurance is a type of coverage that protects businesses when they assume liability through a contract. When your company enters into an agreement where you take responsibility for the actions or negligence of another party, this insurance protects you if a claim arises. It will cover the resulting costs, such as legal fees, settlement or compensation for third-party damages.

Contractual liability insurance covers claims that arise from liability a business assumes in a contract. For example, if your business signs an agreement with a client stating that you will take responsibility for any injury on the client's premises, your contractual liability insurance policy would step in if such an incident happens. This coverage protects your business from the financial burden of lawsuits, medical expenses or damages that may arise from the assumed liability.

In practice, businesses often agree to "hold harmless" agreements, in which they promise to protect another party from certain liabilities. For instance, a construction company might agree to indemnify a property owner from any claims arising from worksite accidents. If an accident occurs, the contractual liability coverage in the contractor's policy will pay for the damages, legal fees and other associated costs.

However, it's important to note that contractual liability isn’t always automatically covered under a standard general liability policy. In many cases, businesses must obtain a contractual liability endorsement, which modifies the insurance policy to cover the specific liabilities assumed under various contracts.

Two common types of endorsements are standard contractual liability and blanket contractual liability.

Standard Contractual Liability Endorsement

A standard contractual liability applies to a particular agreement and provides coverage only for the liabilities outlined in that contract. Businesses that frequently engage in individual contracts that require unique terms may benefit from this endorsement, as it can be tailored to the specific risks involved in each agreement.

Blanket Contractual Liability Endorsement

A blanket contractual liability endorsement provides broader coverage, extending to all agreements involving assumed liabilities under a business’s operations. It benefits businesses that enter into many contracts or have ongoing relationships with multiple clients or partners.

Another critical aspect of understanding contractual liability insurance is familiarizing yourself with the terms or jargon that frequently appear in contracts, such as:

• Hold harmless means that one party agrees not to hold the other responsible for certain damages or legal actions. A contractual liability policy may cover these obligations if a claim arises.
• To Indemnify means one party agrees to compensate the other for losses or damages incurred. Insurance for contractual liability will cover these indemnification agreements, ensuring the indemnifying party doesn’t bear the cost alone.
• To Defend refers to the obligation to provide a defense in a lawsuit. When a business agrees to defend another party in a legal matter, contractual liability insurance can cover the legal fees and other defense-related costs.
• Lessor and Lessee: These terms refer to the parties involved in a lease agreement — typically the property owner (lessor) and the tenant (lessee). Often, lease agreements include clauses where the lessee assumes certain liabilities from the lessor, and contractual liability insurance can cover these responsibilities if a claim arises.

A contractual liability insurance policy may not cover all liabilities, and businesses need to understand what’s excluded to avoid costly surprises.

• Intentional misconduct: Contractual liability coverage typically excludes damages resulting from deliberate wrongdoing or fraud. If a company intentionally causes harm, it cannot expect the insurance to cover the resulting claims.
• Professional errors: If a claim arises from a professional mistake or negligence, such as a design flaw from an architect, a standard contractual liability policy may not apply. Separate professional liability coverage is necessary.
• Employee injuries: Workers’ compensation insurance covers employee injuries, not contractual liability insurance. Contractual liability policies usually exclude claims for employee-related injuries.
• Punitive damages: In cases where a court awards punitive damages to punish wrongful behavior, these damages are often excluded from contractual liability insurance policies.
• Liabilities not assumed by contract: If a liability wasn’t explicitly assumed, it may not be covered. For instance, general risks not agreed upon in the contract might fall outside the policy’s protection.

Small businesses often enter various contracts assuming liability for others, making contractual liability insurance essential for financial protection. Here are its key benefits for small businesses:

• Reduces financial risk: Contract liability insurance helps small businesses avoid significant financial losses from legal claims that arise from contract obligations.
• Protects business relationships: With contractual liability coverage, small businesses can protect their relationships with clients, vendors and partners by ensuring claims are handled smoothly.
• Covers unexpected incidents: Accidents or damages can occur unexpectedly during a contract. Contractual liability insurance ensures these incidents don’t result in unmanageable expenses.
• Complies with contract terms: Many contracts require businesses to have contractual insurance, so having this coverage helps ensure compliance with these legal agreements.

Many industries and professions benefit from having contractual liability insurance. Here’s a list of those who should consider this type of coverage.

The cost of contractual liability insurance varies depending on several factors. Insurers assess the level of risk associated with the types of contracts a business typically engages in. For example, a construction company that takes on high-value contracts with significant risks may pay more for coverage than a consulting firm that assumes minimal liability.

Other factors influencing pricing include the industry, the business’s claims history and the coverage limits required under the policy. The scope of the contractual liability endorsement can also impact the cost. Businesses that take on broader liabilities under multiple contracts may require more comprehensive coverage, leading to higher premiums.