Contractual Liability Insurance: Protecting Every Promise

In today’s business landscape, contracts aren’t just paperwork. They’re the handshake that seals partnerships and drives growth. But every agreement comes with risks. When your business assumes another party’s liability through a written contract, Contractual Liability Insurance becomes essential. This coverage is designed to shield you from the legal and financial impact of those obligations. At Rollo Insurance, we take pride in helping business owners like you navigate the fine print with clarity and confidence. Backed by our core values and commitment to protection, we’ll help you build a coverage plan that keeps your future secure because when it comes to safeguarding what you’ve built, we’re in your corner.

What Types of Businesses Should Consider Contractual Liability Insurance?

Any business that enters into written contracts where they agree to take on the liability of another party should consider Contractual Liability Insurance. This is particularly relevant for businesses in industries such as:

• Construction: Contractors and subcontractors often enter into agreements where they indemnify the project owner or general contractor.
• Real Estate: Lease agreements can contain clauses where tenants assume certain liabilities of the landlord.
• Service Industries: Businesses providing services under contract may agree to hold clients harmless for certain actions.
• Manufacturing and Distribution: Supply chain agreements and vendor contracts can include indemnity clauses.
• Event Planning and Management: Contracts with venues or performers often contain liability transfer provisions.
• Technology and Software: Licensing agreements and service level agreements (SLAs) may include indemnification clauses.

Essentially, if you’re signing contracts that contain phrases like “indemnify,” “hold harmless,” or where you agree to assume the other party’s liability for specific situations, you likely need to consider Contractual Liability Insurance.

What is the Difference Between Indemnity and Contractual Liability?

Indemnity is the legal principle where one party agrees to protect another party against financial loss or liability. It’s the agreement to bear the other party’s responsibility.

Contractual Liability is the insurance coverage that protects the party who has agreed to indemnify another party under a written contract. It provides the financial means to fulfill the obligations assumed in the indemnity clause, such as paying for legal defense costs or settlements.

Think of it this way: Indemnity is the promise, and Contractual Liability Insurance helps you keep that promise.

Can You Provide Me an Example of a Contractual Liability Claim?

Let’s say a small construction company (Subcontractor A) signs a contract with a general contractor (GC) to handle the electrical work on a new building. The contract includes an indemnification clause where Subcontractor A agrees to hold GC harmless for any liability arising from Subcontractor A’s work.

During the electrical installation, one of Subcontractor A’s employees improperly wires a circuit, leading to a fire after the building is completed and occupied. The building owner sues the GC for property damage.

Because of the indemnification clause in the contract, the GC looks to Subcontractor A to cover their losses. Subcontractor A’s Contractual Liability Insurance would then step in to cover the GC’s legal defense costs and any settlement or judgment they are required to pay to the building owner, up to the policy limits. This is because Subcontractor A contractually assumed liability for damages arising from their work.

Is Contractual Liability the Same as Tort Liability?

Tort liability and contractual liability are different legal concepts:

• Tort Liability: Arises from a legal duty owed to another party, regardless of a contract. It’s based on common law principles and involves wrongful acts (torts) that cause harm, such as negligence leading to personal injury or property damage. For example, if your employee carelessly spills a hazardous substance and it damages a neighbor’s property, that would be a tort liability.
• Contractual Liability: Arises specifically from the terms and conditions of a written agreement where one party assumes the liability of another. It’s a liability you voluntarily take on through a contract. In the electrical subcontractor example above, the liability assumed by Subcontractor A for the GC’s losses was a contractual liability.

Why is a Contractual Liability Policy Needed in Addition to a Commercial General Liability Policy?

While a Commercial General Liability (CGL) policy provides broad coverage for your business’s general liability exposures, it often contains exclusions or limitations regarding assumed contractual liability.

Here’s why a separate consideration of Contractual Liability coverage is crucial:

• The “Insured Contract” Exception: CGL policies often have an exception to their “Contractual Liability Exclusion” for certain types of “insured contracts.” However, the definition of an “insured contract” under a CGL policy may be limited and not cover all the indemnity agreements your business enters into.
• Scope of Coverage: Your CGL policy might not adequately cover the full extent of the liability you’ve assumed in a specific contract. Contractual Liability Insurance can be tailored to the specific indemnification obligations you’ve undertaken.
• Limits of Liability: The limits on your CGL policy might not be sufficient to cover a significant contractual liability claim. A separate Contractual Liability policy can provide additional or specific limits for these exposures.
• Clarity and Focus: Having a dedicated Contractual Liability policy can provide clarity and ensure that the liabilities assumed under contract are specifically addressed and adequately covered, rather than relying on the potentially limited coverage within a CGL policy.

Sealing Your Agreements with Confidence

In business, contracts are more than just formalities. They’re commitments that often come with real financial risk. Contractual Liability Insurance helps protect your business when you agree to take on someone else’s liability, giving you the confidence to move forward without hesitation. At Rollo Insurance, we’re committed to helping you understand these risks and secure the coverage that supports your long-term success. With the right protection in place, you can focus on growing your business, knowing you’re backed by people who genuinely care about your future.