What You Need to Know About Contractual Liability Insurance
TLTR: Why do big businesses with numerous lawyers on retainer still get into expensive lawsuits? What exposes small business owners to similar troubles? This article discusses various risks of running a business in 2021 and how contractual liability insurance can save your assets.
U.S. News reports that in 2021, IBM has filed a civil lawsuit worth $1.5 billion against GlobalFoundries due to an alleged breach of contract. On the other hand, GlobalFoundries has disputed that these claims are false and that the court will rule in its favor.
When billions of dollars are at stake, companies can hardly rely on promises alone. Contracts exist to hold all involved parties accountable and to remind them about their responsibilities. Contractual liability in insurance means that you’re liable for the responsibilities addressed to you in the contract.
In this blog
- What is Contractual Liability Insurance?
- Hold Harmless Clause
- How Does Contractual Liability Insurance Work?
- What Does Contractual Liability Insurance Cover?
- Standard Exclusions of Contractual Liability Insurance
- Why Get Contractual Liability Insurance If You Already Have General Liability Insurance?
- Which Policies Include Contractual Liability Insurance?
- What Are the Factors That Determine Cost of Contractual Liability Insurance?
- In Conclusion
- Frequently Asked Questions (FAQs)
What is Contractual Liability Insurance?
Let’s learn a few terms before we learn what contractual liability insurance is.
- Indemnity: Security or protection against a financial loss.
- Indemnify: To compensate a party for any loss.
- Indemnitee: The person who receives the indemnity amount.
- Indemnitor: The person who holds the other party harmless in a contract.
The policy will indemnify the policyholder in the event of third-party liabilities or injuries. These liabilities could be a failure to meet demands, breach of contract, or fraud. Usually, this insurance policy is included automatically in the general liability insurance policy, but only up to a certain limit. We recommend getting a separate,specially-tailored policy.
According to ABC News, Michael Cohen, former general counsel at the Trump Organization, held former US President Donald Trump liable for over $4 million for breaching contracts.
Hold Harmless Clause
A Hold Harmless Clause is one of the key concepts in the contract liability and is also referred to as an indemnity agreement. The clause states that the indemnitor agrees to assume the financial consequences of the indemnitee’s liability. The indemnitor is responsible for the indemnitee’s losses and injuries, but not the liability itself. A Hold Harmless agreement gives the indemnitee the right to collect financial losses from the Indemnitor, even if the liability arises due to the indemnitee’s negligence.
How Does Contractual Liability Insurance Work?
Imagine a store owner, John Doe, who rents space in a building in Georgia. John Doe has already assessed the risks of owning a store and purchased various appropriate insurance policies, including contractual liability insurance coverage.
Upon the time of leasing, the landlord had asked John Doe to sign a contract where Doe must indemnify the landlord for all losses, injuries, and legal fees that may happen in the store’s rented space.
One day, a customer trips on faulty stairs of the store and injures his legs. The customer files lawsuits against the store and the building for the faulty stairs and the negligence to repair them. The customer asks for $20,000 from in losses.
The landlord pays a portion of the claim amount but asks John Doe to repay him, citing the indemnity clause in their contract. Since John Doe has this insurance, the amount paid to the landlord is later paid off by the insurance.
What Does Contractual Liability Insurance Cover?
As a contractor, there are several risks to factor in during one of your projects. If one party fails to meet any of the obligations stated in the contract or the result does not align, contractual liability insurance secures the other party.
Breach of contract
A breach of contract occurs when one of the parties violates the terms and conditions stated in the contract. For instance, Paul, a lawn care specialist, signed a contract with Sophie, the landowner of Charles Street. They both agree on $2,500 as the total payment for Paul’s lawn care service, and Sophie pays Paul an advance of $750.
Before starting service, Sophie finds that Dean’s lawn care services are cheaper than Paul’s services. Lured by the cheaper price, Sophie goes ahead and gets Dean’s services. In this case, Paul can file a lawsuit against Sophie for breaching the contract.
Contract breaches often result in dire consequences. According to The Washington Post, former University of Louisville men’s basketball coach Rick Pitino claims he was fired by the university without any legal cause, despite having a contract to work for them until June 2026. As a result, he sued the University of Louisville Athletics Association claiming $35 million in damages for breach of contract.
Any wrongdoing other than a breach of contract that harms other individuals is called tort. The tort may be categorized as a crime, but it’s an infringement of civil law or statute. Crime is any action that hurts society.
There are three types of tort liabilities that come under protection of contractual liability insurance:
- Negligence: Imagine you’re a building owner who has signed a contractor to upgrade the building’s amenities. As part of the contract, they’re supposed to install new ovens in the kitchen. Unfortunately, due to negligence on their part, they install faulty ovens. In this case, you can sue them for which contractual liability insurance will cover you.
- Intentional Torts: It should be pretty clear that no insurance policy pays for any intentional harm or loss. Defamation, wrongful termination, discrimination, and other such acts come under intentional torts.
- Strict Liability: Strict liability covers all kinds of activities that insurance companies see as inherently dangerous. Bombing construction sites, operating heavy machineries in slopy areas, and working in construction sites without proper gear are such activities.
Standard Exclusions of Contractual Liability Insurance
Some of the most common exclusions of contractual liability insurance are:
Railroad construction or demolition operations
Contractual liability insurance does not cover railroad construction or destruction that affects other parts of the railroad system. The insurance won’t cover any exposed insured either.
Professional services of architects and engineers
Contractual liability insurance coverage is excluded for any professional services performed by architects and engineers. A different coverage such as professional liability insurance is needed for these professions.
Failure to Complete the Contract
Contractual liability insurance covers injuries, losses, and damage to third parties. However, it won’t cover you if you fail to do your part of the work as addressed in the contract.
For example, your construction company was hired to finish a building 18 months from signing the contract. However, you failed to deliver a completed building to the owner. If they sue you, your contractual liability insurance policy won’t come to your rescue.
For example, CNN Business reports that the University of California, Los Angeles (UCLA) filed a claim against Under Armour for deceitfully ending a contract with the university. After entering a contract worth $280 million with Under Armour, UCLA claims that the company struggled with fulfilling its end of the clause and falsified its financial standing.
In this case, since the contract ended due to failure to meet the demands, contractual liability insurance won’t cover Under Armour even if they purchased it.
Why Get Contractual Liability Insurance If You Already Have General Liability Insurance?
General liability insurance automatically covers you against contractual liability, but we still recommend that you get proper coverage with extended limits as your business requirements.
Most commercial general liability insurance policies understandably exclude contractual liability insurance under Coverage A (bodily injury and property damage liability). However, under this exclusion, there are two crucial exceptions:
The liability of the insured imposed without a contract
Everyone has a common-law responsibility not to cause harm to others, whether intentional or an act of omission. This exception provides coverage for bodily injury and property damage in the absence of a contract.
For instance, a restauranteur who leases the space from a landlord injures a customer through negligence. The customer sues the landlord and the restauranteur for their injuries. Despite not having a written agreement stating that the restauranteur agrees to be held liable for these types of claims, they are still responsible for their negligence.
Any liability assumed in an insured contract
This exception provides coverage if the injury or damage occurs after the contract. The liability assumed under an insured contract refers to liability incurred when one promises to hold another party harmless, and this liability does not result from a breach of contract.
The parties who bear the liability under the contract fall under a standard general liability policy usually. However, the coverage for contractual liability is available by an exception to exclusion under Coverage A of commercial general liability, which covers liability for bodily injury and property damage.
Which Policies Include Contractual Liability Insurance?
Insurance is like clay – you can shape it according to your needs. Businesses need different coverages based on their operations and exposure to risks. Here are some policies that include the contractual liability insurance policy:
General Liability Insurance
As mentioned before, a general liability insurance policy automatically covers contractual liability insurance. The U.S. requires all businesses to purchase general liability insurance. Although most people believe the policy covers property damage, injuries, and third-party losses, it covers a vast range of risks such as libel, breach of contract, fraud, falsified claims, and more.
Engineers and architects work on big projects and construction sites that require huge funds. Naturally, engineers must sign contracts and fulfill their end of responsibilities. Engineer insurance with a contractual liability insurance policy protects the professionals if the contractor sues them for not using the correct building materials or not following the blueprint of the building.
Working as a third-party contractor is an excellent way to work on your terms, but there are certain risks that you’re putting yourself at by entering contracts with other parties. One of the best ways to prevent this from happening while still working for and being independent is by purchasing contractual liability insurance. Having it included in your contractors insurance policy will help avoid these problems!
What Are the Factors That Determine Cost of Contractual Liability Insurance?
Some of the factors that affect the cost of contractual liability insurance coverage are as follows:
- The number of independent contractors: when your project involves many contractors, there is naturally a higher chance for negligence. This in turn increases contractual liability insurance costs.
- The contract history: the type of contracts signed and one’s previous work history will also affect the premium you have to pay for coverage.
- The operation in different states: the payment of the premium for the coverage depends on how each state’s regulations operate under a contract.
Contractual liability is tricky to understand, and both parties can sue each other for any dissatisfaction during or after the completion of the project. However, every business, big or small, can get protected against any future potential lawsuits.
An insurance agent can identify your risks, figure out how much insurance limit you need, understand your budget and get you affordable quotes. If you’re not sure where to start, find a local agent in our insurance directory.
Frequently Asked Questions (FAQs)
What is contractual liability in motor insurance?
Car insurance, or motor insurance doesn’t cover any contractual liability that a policyholder has towards the car they’re purchasing. For example, you bought a new car and purchased car insurance for it. However, you’ve signed contracts with someone else where you’ve allowed them to use your car. If the person accidentally smashed your car, then your insurance will not cover the damage. In other words, contractual liability in motor insurance is nonexistent.
How much is contractual liability insurance?
The cost of a contractual liability insurance policy depends on a number of factors such as the state, size of your business, number of business operations, and more.
The policy comes as a package with general liability insurance, so we could take the price of the general liability policy as a cursor. Progressive reports that small businesses could pay an average of $53 per month for general liability insurance. For more information regarding costs and discounts, get in touch with our insurance agents.
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