Contractual Liability Insurance

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Any seasoned professional knows that when two or more parties are bound by a contractual agreement, one can be held liable for several obligations and violations. Contractual liability insurance helps protect the insured against liabilities that parties assume when entering into a contract. These liabilities could be a failure to meet demands, breach of contract, or fraud. A careless mistake or a small error could turn out to be costly to either party.  

According to a USA Today, at least 60 lawsuits have been filed by contractors against Donald Trump for breaching contracts.  As a contractor, this is one of the reasons why you should have contractual liability insurance. It is one of the key aspects of risk management that should be a part of an overall business strategy since it protect from potential financial catastrophe. 

In this article

What Is Contract Liability? 

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 other party for any damages caused during the contract. One of the key concepts to understand in contract liability is the Hold Harmless clause, also referred to as an indemnity agreement.

A Hold Harmless clause states that the contractor (the indemnitor) agrees to assume the financial consequences of the other party’s (the indemnitee’s) liability.  An indemnitee is the party that is to be protected from financial losses in the event a third party sues them. The indemnitor takes on the financial consequences of the indemnitee’s liability, 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 much does contractual liability insurance cost

What Does It Cover? 

As a contractor, there are several risks you need to prepare yourself for if something goes wrong during one of your projects. If you fail to meet any of the obligations stated in the contract, or the result does not turn out as expected, you are liable to face lawsuits from the affected 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. As per the contract, they both agree on $1500 as the total payment for Paul’s lawn care service and Sophie pays Paul an advance of $750. Before starting service, Paul receives a more significant offer of work that is due at the same time Sophie’s is.  Lured by the offer, Paul goes ahead with the latter offer and does not provide the service as promised to Sophie. In this case, Sophie can file a lawsuit against Paul for breaching the contract and suing for the $750 advance.

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.


Contract fraud occurs when one of the parties of the contractual agreement deliberately presents false information to mislead the other party. For example, Jane, founder of ABC Consultancy, signed a two-year contract with Danielle, who claimed to have years of experience in bringing potential clients as a consultant. However, the experiences and references she presented were fictional making it a case of contract fraud. In this case, ABC Consultancy can sue Jane for fraud, and the legal fees will be taken care of by contractual liability insurance.

Common Exclusions of Contractual  Liability Insurance 

Some of the most common exclusions of contractual liability insurance are: 

Railroad construction or demolition operations

Any type of railroad construction or destruction that affects other parts of the railroad system is not covered by contractual liability insurance. Furthermore, if any insureds are exposed to these exclusions, they will not be covered by the insurance either.

Professional services of architects and engineers

Contractual liability insurance will not include coverage for any professional services performed by architects and engineers. A different coverage such as professional liability insurance is needed for these professions.


Don’t wait until it’s too late! Get your affordable and custom-tailored contractual liability insurance policy quote for your business today.

Commercial General Liability Insurance Vs. 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:

The liability of the insured imposed without a contract

Everyone has a common-law responsibility to not cause harm to others, whether it is 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, the restauranteur is still responsible for their negligence.

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 another party harmless, and this liability does not result from 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.

what is contractual liability insurance

Insurance Policies That Include Contractual Liability Insurance

Different types of businesses need different insurance packages. The types of insurance packages that include contractual liability insurance are: 

What Are the Factors That Determine Its Cost?

Some of the factors that affect the cost of contractual liability insurance 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. 
What is contractual liability insurance?

Contractual liability insurance assumes the liable party’s financial losses by reimbursing for the property damage and bodily injury caused to a third party. 

What is a Hold Harmless agreement?

A Hold Harmless agreement, also known as an 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. Indemnitor is the party who bears the risks of the indemnitee. 

What does contractual liability insurance cover?

Contractual liability insurance provides coverages to the liable party from incurring losses specified in a contract. The losses could arise due to contract fraud or breach of contract. 

Is your business in need of contractual liability insurance? Get your affordable and custom-tailored quote today. 

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