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Person signing a contract

One heading in your general liability policy is Contractual Liability. Like all of the sections in your Business Owner’s Policy (BOP), it’s important to understand the purpose of this liability insurance and why your company needs it. Contractual liability is when one party assumes liability on behalf of another through a contract between them. This coverage is supplied in most general liability policies. It can save you thousands of dollars in court fees if you know how this coverage works and how to protect against contractual liability when it occurs.

Indemnity Agreement

If you have signed a contract with a business, chances are it contained an indemnity agreement. An indemnity agreement is an agreement made by one party to take on the liability for another party – these are also called a hold harmless agreement.

An indemnity agreement is if Company A concurs that if Company B gets sued by Company C because of negligence on Company A’s part, then Company A will reimburse Company B for expenses from the lawsuit with Company C. This is a way to transfer the risk of financial loss due to someone else’s negligence. It can be a little confusing, so here’s an example of the process in action:

Restaurant A signs a contract with Construction Company B to fix the roof, and an indemnity agreement is included in the contract. Construction gets underway.

Colin goes to Restaurant A, and while he is eating, a shingle falls off the roof during construction, breaking one of his car windows. Colin sues Restaurant A due to the negligence of the shingle not being properly put on and breaking his window.

Construction Company B reimburses Restaurant A for damages and defense costs in a lawsuit brought on by its negligence during the duration of the contract.

Contractual Liability Exclusions

Some contractual liability coverages have exclusions. The exclusion applies to bodily injury or property damage that the insured is obligated to pay for. There are two exceptions to the exclusion: the liability the insured would have in the absence of the contract and the liability assumed under an insured contract. Insured contracts are covered after the contract has been fulfilled. In those cases, the insurance provider would be covering the costs instead of the company.

Contractual liability is included in general liability insurance policies and it is best to know how much you are covered for in case of a future contract and lawsuit. When making contracts with outside companies, you may want to question what their coverage includes and if you are signing an indemnity agreement. General liability policies that include this and other commercial-centric insurance can help protect you against all kinds of liabilities you may assume when entering into a variety of different types of contracts.

The insurance experts at World Insurance Associates are here to help you get the coverage needed for your business and protect you from future risks. Get in touch today.



This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.

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