What is contractual liability insurance?
Contractual liability insurance protects your business from financial losses for some obligations or liabilities outlined in a contract.
Unlike general liability insurance, which helps cover general risks like property damage or bodily injuries and excludes contractual liability from coverage, contractual liability insurance specifically addresses the risks you agree to in contracts.
Contractual liability and hold harmless agreements
Say you’re a general contractor and hire an electrician to work on a construction project. If the electrician were to accidentally electrocute themselves on the job, you could be partly responsible for their medical expenses — unless you included a hold harmless agreement in their contract. Then, the subcontractor could not sue you for medical expenses; they agreed to “hold you harmless.”
In these kinds of business contracts, the subcontractor assumes all the risk related to the work, and the general contractor avoids liability. This is where contractual liability insurance becomes handy. It can help protect policyholders — in this case, the subcontractor — from financial losses resulting from hold harmless agreements.
What does contractual liability insurance cover?
Contractual liability insurance can help cover the financial risks of obligations you agree to in work contracts. This includes:
- Indemnity agreements: When you agree to reimburse another party for any damages/losses you or your employees may have caused.
- Hold harmless clauses: These clauses mean you agree not to sue another party for certain types of injuries or property damage, and you could be on the hook for them as a result.
- Waivers of subrogation: This clause prevents your insurance company from trying to get money back from another party after they’ve paid out a claim.
- Assumption of liability: In some contracts, you might agree to take financial responsibility for someone else’s actions, even if you weren’t involved.
Who needs contractual liability insurance?
Any business that works with contracts with other businesses should consider carrying contractual liability insurance as part of their risk management plan. The coverage can add a layer of protection for you and your business beyond commercial general liability insurance and professional liability insurance.
Small businesses can be particularly vulnerable because they often lack the resources to handle large, unexpected expenses. Contractual liability insurance helps protect your business from these unexpected financial burdens.
Additionally, certain industries, like construction, legal services or financial services, frequently involve complex contracts with high stakes. In addition to protection, this insurance can help enhance your credibility and trustworthiness with clients and partners. It shows that you’re prepared to manage risks, which can be a competitive advantage.
4 common contractual liability insurance myths
Understanding the realities of this type of insurance is crucial for making informed decisions about your coverage needs.
Common misconceptions include:
- A general liability policy covers contractual obligations. While general liability covers many risks, it doesn’t typically include liabilities you agree to in a contract.
- Only large businesses need it. Small businesses face the same risks and need this coverage to protect themselves from potentially devastating financial losses.
- Being careful with contracts means no need for insurance. Even well-negotiated contracts can include risky clauses.
- It’s too expensive. Costs will vary depending on the size of your business, your industry, the types of contracts you enter into and the level of risk involved. The cost of being uninsured could be far greater than the insurance premium.
What are contractual liability riders?
You may be thinking, “Wait! I gotta buy a whole new policy if I want to be covered for contract work?!”
Not necessarily; you might just need to add a rider.
In insurance, riders, also called endorsements, are additions to an insurance policy. You’re probably already familiar with some:
- If you buy auto insurance and your insurer offers 24/7 roadside assistance for a small fee, that’s a rider on your auto policy.
- If you’re a restaurant owner and you add protection against food spoilage to your commercial property insurance, that’s a rider, too.
Likewise, with some carriers, you can add a contractual liability endorsement to your commercial general liability policy. These riders come in two flavors:
- Blanket contractual liability endorsement. A blanket rider covers every contract you enter into. While this is super convenient, it can be expensive.
- Standard contractual liability endorsement. A standard endorsement requires you to list every contract you want covered. This rider is less expensive than blanket coverage and a good choice if you only have a select number of contracts. The downside to this type of rider is that if you accidentally forget to add a contract to the policy, it won’t be covered.
If you enter into a contract with hold harmless or indemnity clauses, standard business insurance might not be enough. That’s when contract liability insurance or contract liability endorsements can step up to add another layer of protection.
