Contractual Liability Insurance
What is contractual liability insurance?
Contractual liability insurance indemnifies the policyholders from liabilities stated in the contract. In simple terms, it helps to protect against liabilities that parties assume when entering into a contract. The purpose of contractual liability is to pay on behalf of the liable party for the bodily injuries and the property damages caused to the third party.
Parties involved in a contract binds them in a contractual relationship with certain obligations to abide by. A negligent mistake that violates those obligations can turn out to be costly to the liable party. According to Slate, around sixty lawsuits have been filed by contractors against Trump for avoiding payment of bills and breaching the contract. As a contractor, this is one of the very reasons why you should have contractual liability insurance. It is one of the key aspects of risk management that should be part of one’s overall business strategy. It helps to protect you from the financial catastrophe that may come your way.
Before understanding about contractual liability insurance inside-out, it is essential to understand the general terms as to what contract liability stands for.
What is contract liability?
Outside the context of insurance, contract liability assumes the liability of one party on behalf of another party as a result of a contractual agreement. In a general contract scenario, one party agrees to hold another party harmless for any accidents while the contract is still in effect. The contractor agrees to indemnify the party to cover for the damages caused during the contract. One of the key pointers to understand in contract liability is hold harmless. This is also referred to as indemnity agreement.
A hold harmless clause, also known as indemnity agreement assumes the financial burden of another party’s liability. The purpose of this agreement is to transfer the risk of financial loss from the indemnitee to the indemnitor. An indemnitee is the party who is to be protected from incurring losses caused to the third party. On the other hand, an indemnitor is the party who takes the risk on behalf of the indemnitee. However, there are certain cases when the indemnification agreement does not just transfer the financial losses. In well-stated hold harmless agreement, it gives the indemnitee the right to collect for the financial losses from the indemnitor, even if the liability arises on behalf of the indemnitee’s negligence.
What does it cover?
As a contractor, there are several risks you need to prepare yourself from if something goes awry during one of your projects. If you fail to meet any obligations stated in the contract, or the end result does not turn out to be as expected from the contract, you are liable to face lawsuits from the affected party. Such as:
Breach of contract
A breach of contract takes place when one of the parties violates the terms and conditions stated out in the contract. For instance, Mr. Paul, a lawn care specialist, signed a contract with Ms. Sophie, the landowner of Charles Street. As per the deal, they both have agreed on $1500 as the final payment for the lawn care service. For this, Ms. Sophie had paid $750 as an advance to Mr. Paul. Before the service, Mr. Paul got another offer which was due at the same time as that of Ms. Sophie’s deal. Lured by the offer, Mr. Paul went ahead with the latter offer and did not show up to provide the service as promised to Ms. Sophie. In this case, Ms. Sophie can file a lawsuit against Mr. Paul for breaching the contract and suing for the money given, i.e., $750 to be reimbursed to Ms. Sophie.
If a contract is breached, it can result to dire consequences. According to WashingtonPost, former men’s basketball coach, Rick Pitino, was fired by the school without any legal cause to it. He then sued Louisville Athletics claiming $35 million as his contract was breached.
Contract fraud takes place when one of the parties of the contractual agreement deliberately presents information that misleads the other party. For example, Ms. Jane, founder of ABC Consultancy, signed a two-year contract with Ms. Danielle, who claimed to have years of experience in bringing potential clients as a consultant. However, the experiences and references she presented was false. This is considered as contract fraud. According to NBCnews, in 2011, workers of the GSA filed a lawsuit with the Labor Department’s Wage and Hour Division claiming the contracts were solely based on fraud since they were cheated on their payroll system.
Common exclusions of contractual liability insurance
Most commercial general liability insurance policies exclude contractual liability insurance under Coverage A – bodily injury and property damage liability.
However, under this exclusion, there are two crucial exceptions to it.
1) The liability of the insured imposed without the contract.
2) The liability assumed in a contract.
- The liability of the insured imposed without the contract.
This exception provides coverage for bodily injury and property damage in the absence of the contract. For instance – A restauranteur wants to fix the wiring of lights in the outdoor snacking area. The wire rental agreement states that the restauranteur is responsible for any injuries or damages that may occur to the third party caused during the wire fixing.
- The 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 harmless another party, and this liability does not result from breach of contract.
The parties who bears the liability under the contract generally fall under a standard general liability policy. However, the coverage for contractual liability is available by an exception to an exclusion under Coverage A of commercial general liability, which covers liability for bodily injury and property damage.
Types of insurance that includes contractual liability insurance
What are the factors that determine its cost?
Some of the factors that affect contractual liability insurance are as follows:
- The number of independent contractors:
The more the number of people involved in contract, chances are higher for negligence to take place. This in turn affects the 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 the coverage.
- The operation in different states:
The payment of the premium for the coverage depends on how each state regulations operate under a contract.
Frequently Asked Questions (FAQs)
What is contractual liability insurance?
Contractual liability insurance assumes the financial losses of the liable party by paying on behalf of the property damage and bodily injury caused to the third party.
What is a hold harmless agreement?
A hold harmless agreement, also known as indemnity agreement protects one party i.e., the indemnitee from any losses that may occur in the future due to a particular activity caused to the third party. Indemnitee is the party who bears the risks of the indemnitee.