Contractual Liability Insurance: A Comprehensive Guide

Contractual liability insurance helps protect small business owners from legal risks that can arise when they make agreements with other businesses. This coverage is often included as part of your general liability insurance.

Key Takeaways: Contractual Liability Insurance

  • Definition: Protects businesses from financial risks due to contract agreements.
  • Coverage:
    • Injury: Covers injuries on business premises due to contracts.
    • Property Damage: Covers damages based on agreements, especially in construction.
  • Exclusions: Doesn’t cover unfinished, unsigned, or delayed contracts.
  • Indemnity Agreements: Clauses that place responsibility on one party to cover losses for another.
  • Easements: Influences contractual liability; specific exceptions for railways.
  • General Liability Relation: Some contractual liability is covered, but specifics vary.
  • Pricing: Averages around $500 annually for small businesses.
  • Endorsements: Adjustments to policies; two main types: standard and blanket.
  • Importance: Essential for businesses with contractual obligations; understanding limits is crucial.

Understanding Contractual Liability Insurance

Contractual liability insurance, often called CLIP, shields your business from financial risks associated with contract agreements. When you sign a contract, you may become responsible for legal and financial obligations, like a lease agreement that makes you liable for customer injury claims at your retail store. This is sometimes referred to as a “hold harmless agreement.” It means you’re agreeing to take on liability and financial duties on behalf of the other party you’ve contracted with, aiming to protect them from liability claims and financial losses.

Understanding Contractual Liability Insurance

The Scope of Contractual Liability Insurance

Contractual liability insurance takes care of the responsibilities you take on when you sign a lease or any other kind of contract. This can involve two important things:

Responsibility for Injuries

When you rent space from a commercial landlord, they usually want you to have a contractual liability agreement. This means that if a customer gets hurt and sues because of something like a slip-and-fall at your business, your contractual liability makes your business responsible for covering any claims related to injuries or other harm. In simple terms, you pay for it, not the landlord.

Responsibility for Property Damage:

In fields like construction, contracts often have clauses about contractual liability. For example, a general contractor might have an agreement like this with the customer. This agreement makes the general contractor responsible for certain claims and risks related to the project, such as damage to property. They might also have similar agreements with subcontractors for their specific work on the project.

In a nutshell, contractual liability insurance is there to handle the obligations you agree to when you sign contracts, whether it’s about injuries or property damage.

Contractual Liability Insurance: The Exclusions

Remember that there are some things that contractual liability insurance doesn’t cover. It won’t help with lawsuits or claims against your business when you don’t meet your contract obligations. For instance, if a customer sues you because a project was delayed or left unfinished, this insurance won’t step in.

It also won’t cover contracts that aren’t complete or haven’t been signed by both parties. In other words, if the agreement isn’t final and agreed upon by everyone involved, this insurance won’t apply.

Contractual Liability Insurance: The Exclusions

Indemnity Agreements Explained

An indemnity agreement, also called an indemnity clause, is something added to a contract. It basically says that your business is on the hook for certain losses and claims.

This agreement can also go by the names “hold harmless clause” or “hold harmless agreement.” Here’s how it works: as the indemnitor, your business promises to protect the indemnitee from any losses they face that fall under your contractual liability, like damage to property or injuries to customers.

These additions are pretty common in leases and business contracts, so it’s crucial to know about them and ensure your business is financially safe.

How do easements influence contractual liability?

Contractual liability can also come into play when dealing with easements on your business property and the associated risk transfer.

Easements are considered as “insured contracts,” except when they involve construction or demolition within 50 feet of a railroad line.

If your local municipality holds an easement for maintaining water and sewer lines that cross your property, they take on the liability for any work they perform on your property to service those lines. To put it simply, if the local government digs a big hole on your property to access a water line, they’re responsible for any resulting liabilities.

This is akin to elevator maintenance agreements that landlords make with contractors. In an elevator shaft easement, the contractor takes on the responsibility for any lawsuits related to the elevator’s maintenance and operation. In essence, the contractor assumes all the risks associated with operating the elevator.

Does a general liability policy include contractual liability coverage?

Commercial general liability insurance includes some types of contractual liability, but not all.

This insurance covers business risks like customer injuries and damage to their property. It handles the costs of legal defense, settlements, and judgments.

Does a general liability policy include contractual liability coverage?

Your policy takes care of claims from third parties related to injuries and property damage, even if they arise from a lease or contract with an indemnity or hold harmless agreement. For instance, if you lease a business property and agree to cover the landlord for customer injuries, your policy still protects you against those risks since it already covers customer injuries.

However, if a customer sues you for breaking a contract, or if your work is delayed, incorrect, or never completed, your general liability policy won’t help. For these situations, you’d need professional liability insurance, also known as errors and omissions insurance (E&O).

What is the price of contractual liability insurance?

Small business owners typically pay around $42 per month for contractual liability insurance, which adds up to roughly $500 annually.

The cost of general liability insurance, which includes contractual liability coverage, can vary based on a few factors:

  • Location
  • Size of your business
  • Policy limits
  • Claims history

These elements all play a role in determining how much you’ll pay for your insurance.

Contractual Liability: Endorsement Examples

An insurance endorsement is like a little change you make to your insurance policy to adjust what it covers. Depending on how you use it in your risk management plan, an endorsement can either add or take away coverage.

When it comes to contractual liability, there are two kinds of endorsements you can tack onto your general liability coverage: standard and blanket.

Standard Endorsement

A standard contractual liability endorsement adds coverage to specific contracts that you want to be protected under your contractual liability insurance. To get this endorsement, you simply give your insurance company a list of the contracts you want the coverage to apply to. Usually, this type of endorsement costs less than a blanket coverage endorsement.

Blanket Endorsement

On the other hand, a blanket contractual liability endorsement covers all the relevant contracts your business has. You don’t need to provide your insurance provider with a list of specific contracts. However, this type of endorsement is typically more expensive compared to a standard endorsement.

FAQs about Contractual Liability Insurance

Is contractual liability insurance mandatory?

It depends on the nature of the contract. Some contracts may require one or both parties to carry contractual liability insurance, especially in industries or scenarios where there’s a high potential for loss or liability.

What is the difference between general liability and contractual liability insurance?

General liability insurance covers businesses against claims resulting from injuries and damage to people or property. Contractual liability insurance, on the other hand, specifically covers liabilities that arise out of a contract.

Does a standard general liability policy include contractual liability coverage?

Many general liability policies do include a form of contractual liability coverage, but it’s crucial to read the policy specifics. There can be exclusions or limitations.

What types of contracts might include indemnity or “hold harmless” clauses?

Lease agreements, service contracts, construction contracts, and equipment rental agreements are some examples where you might find indemnity or “hold harmless” clauses.

Are there exclusions in contractual liability insurance?

Yes. Common exclusions might include liabilities for breach of professional services, deliberate breaches of contract, or liabilities that go beyond what’s specified in the contract.

How is the premium determined?

Premiums are based on several factors, including the type and nature of contracts, the business’s industry, history of claims, and the coverage limits chosen.

Can I buy contractual liability insurance as a standalone policy?

While it’s commonly included in general liability policies, there are situations where a standalone policy or an endorsement to an existing policy might be available.

What should I look for when buying contractual liability insurance?

Understand the nature of your contracts and potential exposures. Look for coverage limits that match your risk, and be aware of any exclusions or conditions.

Conclusion

Contractual liability insurance is vital for businesses, especially when entering agreements. Often part of general liability policies, it shields against financial risks tied to contracts, notably those with indemnity clauses. However, it doesn’t cover everything. As businesses navigate complex deals, understanding and tailoring their insurance to match specific needs becomes essential. Thus, taking steps like acquiring the right insurance ensures ongoing business stability and growth.

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