If you own a small, medium or even large business, one of the biggest threats to your livelihood is liability. 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 lessen liability risk. One insurance coverage that is easy to overlook is contractual liability coverage. If you do a lot of contractual work, you could be putting your business at risk if you are don’t have proper protection against mistakes or accidents. Let’s examine contractual liability, its exclusions and endorsements so that you can mitigate your liability risk.
What is Contractual Liability Insurance?
Contractual liability insurance is automatically provided within the Commercial General Liability (CGL) policy since 1986. In simplest terms, contractual liability is a transfer of risk that occurs when one party assumes liability on behalf of another via contract. It covers liability you assume under a lease, rental agreement or other common business contract. Any time you sign a contract, you agree to do something for someone else or assume liability. CGL Insurance is a standard insurance policy issued to businesses and organizations to protect them against liability claims. These may include Bodily Injury (BI) and Property Damage (PD) arising out of premises, operations, products and complete operations. Additionally, it includes advertising and Personal Injury (PI) liability.
Why is CGL a requirement?
Common law establishes that business owners owe a duty of care to the public, regardless of the business they operate. Unfortunately, accidents do happen and people or parties may allege the following three things:
- A duty of care was owed.
- That duty of care was breached.
- Damages and/or injuries were incurred.
They may then allege that a business has been negligent and is responsible for compensating them for their damages.
What is covered by CGL insurance?
The typical CGL insurance policy contains numerous types of coverage including:
- Bodily injury to third parties
- Products Liability
- Tenants Legal Liability
- Property damage to third parties
- Complete operations
An example of Contractual Liability
Contractual liability is a very important concept in the world of risk management and insurance. 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 CGL coverage.
A CGL policy protects you when you are working directly for a homeowner or business. For example, a homeowner hires you as a plumber to fix a faucet. If during the repairs you break a pipe that damages the homeowner’s furniture, your CGL policy would likely pay for the damage.
When CGL does not cover you
Most CGL policies will exclude coverage when you enter into a contract to do work for a third party. If said contract includes a “hold harmless clause,” you may no longer have protection from your general liability contract. Contractual liability coverage can protect you in these types of situations, but it can also be complex.
What’s a “hold harmless” clause?
Let’s continue with our plumber example. You’re a plumber that works under a general contractor who signs a “hold harmless” agreement for a new commercial building. If you break a pipe while working for the contractor, your business and only your plumbing business will be liable. Liability includes damages and any resulting lawsuit as a result of the break.
The “hold harmless” section the contractor signs clears him of the damage you cause, even though you are under contract with him. Even if the building owner sues the general contractor, you will have to pay for the contractor’s legal fees and any damages that are given in the lawsuit. This means you assume all of the risk that comes with your work while the general contractor assumes zero. This is where a contractual liability policy comes in handy.
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 CGL coverage.
Contractual Liability exclusions
Contractual Liability Insurance can be complex, and the insurance coverage is very limited. Therefore, it may contain a few exclusions that 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.
- Coverage limits are important: Like all insurance policies, there are coverage limits when it comes to contractual liability coverage. Always make sure that you purchase the correct amount of insurance to cover the value of the contract.
Contractual Liability endorsements?
In insurance, an endorsement is a change to the coverage in your insurance policy. It can add coverage for something that was previously excluded from the policy. A CGL 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 CGL policy. There are 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 on a separate page of the policy, which is a part of 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 will have coverage.
Certificate of Insurance (COI)
A Certificate of Insurance (COI), (or a Certificate of Liability Insurance,) is a one-page document that summarizes your coverage and can be used as proof of insurance. The form includes policy details, such as coverage limits and effective dates, so business owners can find and share them easily without revealing private information. When trying to grow your business and acquire new contracts, clients will ask to see your COI because they want to protect their business. When they see you have liability insurance, they trust you have the financial resources to cover any allegations of damages, injuries or substandard work that result from your business dealings.
Contractual Liability best practices
Contractual liability is a necessary business risk and the trade-off can be very profitable. However, it may contain exclusions that can plague your business if something goes wrong after the contract is signed. These exclusions must be addressed by your business proactively:
- Check the insurance coverage related to companies you do business with, such as suppliers, manufacturers and subcontractors,
- Ensure contracts from vendors or suppliers provide you with proof of insurance by means of a COI.
- Contracts can contain “hold harmless” agreements that do not fall within the CGL and contractual liability policy. It is important to address this before the contract is signed.
- It’s sound business practice to provide a copy of your contracts to your isure broker. There may be insurance requirements in them that your policy currently does not cover. Additional coverage may be required or the policy contract wording may need modifying.
Contractual liability is a transfer of risk that occurs when one party assumes liability on behalf of another via a contract. However, you should be aware that there can be limitations. Let our isure representatives help you understand the coverage your business needs in order to fulfill contracts and grow your business.