Why Should a Business Protect Against Contractual Liability?

Business contract detailsOne 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, as well as 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 for them to fix the roof and their is an indemnity agreement included in the contract Then Construction Company B starts construction on the roof of Restaurant A Colin goes to Restaurant A, and while he is eating a shingle from the roof falls off the roof during contruction and breaks 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 cost of the lawsuit brought on by their negligence during the duration of the contract

Contractual Liability Exclusions

Some contractual liability coverages have exclusions for their coverage. The exclusion applies to bodily injury or property damage that the insured is obligated to pay for the damages. There are two exceptions to the exclusion, first is the liability the insured would have in the absence of the contract and second liability assumed under an insured contract. Insured contracts are covered by an insured after the contract has been fulfilled. In those cases, insurance 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 also if you are signing an indemnity agreement. General liability policies that include this and other commercial-centric insurance help protect you with to any liability you may assume by entering into a variety of different types of contracts such as a building lease.” At TJ Woods Insurance Agency, our insurance experts can help you get the coverage you need for your business and protect you from future risks. Contact us today to learn more.