If you own a small, medium or even large business one of the biggest threats to your livelihood is liability. If a person is injured or property is damaged due to your work you may end up the target of a lawsuit. Legal bills and damage awards can quickly spiral out of control, putting your business at risk.
There are numerous commercial insurance products, including general liability insurance, that can help you mitigate liability risk. One insurance coverage that is easy to overlook is contractual liability coverage. If you do a lot of contractual work as a third party, you could be putting your business at risk if you are not properly protected against mistakes or accidents.
In addition to solid contractors insurance, contractual liability coverage could protect you in these types of situations, but it can be complicated. This article will explain the basics of this coverage.
What is Contractual Liability Insurance?
Let's begin at the beginning. Contractual liability is risk that you assume on behalf of another party due to a contract you've signed with them. The part of the contract that's relevant here is a specific section, generally referred to as a "hold harmless" clause.
Contractual liability insurance comes in handy when dealing with contracts that have a “hold harmless" clause.
What's a "Hold Harmless" Clause?
A section like this generally means that you agree that the other party to your contract is not responsible if something happens on the job, regardless of fault. Let's take an example of a plumber working under a general contractor, who has signed an agreement like this. If you break a pipe which results in significant water damage to the property, your business and only your business will be liable for the damages and any resulting lawsuit.
Even if the injured party sues the general contractor, you will have to pay for the contractor’s legal fees and any damages that are awarded in the lawsuit.
All of this basically means that you assume all of the risk that is associated with your work while the general contractor assumes zero. This is where a contractual liability policy comes in handy.
In short, you are assuming a certain risk when you work with another party on a project.
Why You Might Need a Contractual Liability Insurance Policy
Any business that works on a contractual basis with other businesses should consider carrying contractual liability insurance. It adds a layer of protection that goes above and beyond your commercial general liability coverage.
A general liability policy protects you when you are working directly for a homeowner or business. As an example, if a homeowner hires you to perform a plumbing repair and you somehow manage to break a pipe that damages the homeowner’s furniture, your general liability policy would likely step up and pay for the damage.
However, most general liability policies will exclude coverage when you enter into a contract to do work for a third party, especially when that contract has a specific clause. If the contract that you sign includes a “hold harmless clause” you may no longer be protected by your general liability contract.
Contractual Liability Exclusion
Contractual liability insurance is a complicated and narrow insurance coverage so there are a few exclusions and pitfalls you should be aware of:
- Failure to complete a contract: Contractual liability insurance only covers damage you do to other people's property and injuries to people, it does not cover failure to live up to the terms of your contract. In our plumbing example, if for some reason you failed to install all of the plumbing you agreed to and are sued by either the contractor or the building owner, your contractual liability policy will not protect you.
- Coverage limits are important: Like all insurance policies, there are coverage limits when it comes to contractual liability coverage so always make sure that you purchase the correct amount of insurance to cover the value of the contract.
What are Contractual Liability Endorsements?
In insurance, an endorsement is a change to an insurance policy. A commercial general liability policy will almost always include an endorsement that excludes risks that you assume when you sign a contract with a third party. It's possible to add a contractual liability endorsement to a commercial general liability policy and it comes in a couple of different varieties:
- Standard Contractual Liability Endorsement: A standard contractual liability endorsement (which is just a policy rider you purchase to cover additional risks) requires you to list the various contracts you want covered by the endorsement.
All applicable contracts must be listed on a separate page of the policy, which is attached to the policy. The big downside to this type of policy endorsement is that if you accidentally forget to add a contract to the policy, there will be no coverage for it.
- Blanket Contractual Liability Endorsement: While this type of endorsement tends to be more expensive, it's more convenient. A blanket endorsement covers all of your contracts instead of requiring you to list them individually. All new contracts you sign are covered.
The Bottom Line
Be aware that there can be limitations to contractual liability insurance. In addition to the coverage limits of the policy there may be limits on certain types of losses. Read your policy in its entirety and talk to an agent about any questions you have.
While contractual liability can help if you end up on the wrong end of a lawsuit, it's also complicated coverage so it's important to understand properly.