Understanding Contractual Liability

Contractual liability  - TJ Woods Insurance, MAWhen businesses sign an agreement to work together or lease a property, it often involves signing an indemnity agreement, also known as a hold harmless agreement.

Definition of Contractual Liability

In this agreement, one party promises to assume the liability of the other under specified conditions, which is called contractual liability. If Company A assumes contractual liability for Company B and Company B is sued, then Company A will indemnify (reimburse) Company B for the costs of the lawsuit.

Common examples are property leases, equipment leases, easements, and elevator maintenance agreements. A building lease may require the tenant to indemnify the landlord if someone is accidentally injured as a result of the tenant’s use of the building, and the injured person sues the landlord.

In other cases, a company signs a contract with another company agreeing to complete a project or hiring them to complete one. For example, a property owner hires a general contractor to complete a building project. The general contractor hires a subcontractor to perform a specific job, such as an electrical contractor to installing the building’s wiring. The general contractor can require the electrician to sign an indemnity agreement assuming contractual liability for their electrical work.

What Happens When A Lawsuit Is Filed?

If the electrician’s negligence results in bodily injury or property damage, the injured party could file a lawsuit against the general contractor. The indemnity agreement will NOT prevent third parties from suing the general contractor. However, the electrician would become responsible for the financial consequences related to their electrical work, including damages to the injured party and legal defense costs for the general contractor. An indemnity agreement typically overrides common law because it assigns liability to a party that it wouldn’t ordinarily fall to. The idea is that the one doing the actual work is in a better position to prevent loss.

If one company gets another to assume contractual liability, they may also add a provision requiring the company to purchase liability insurance – to make sure the party assuming liability can afford to pay for financial consequences. At TJ Woods, General Liability coverage extends to any liability you may assume by entering into a variety of different types of contracts, such as a building lease.

Contractual Liability Exclusion

There are certain Contractual Liability Exclusions: the employers liability exclusion in your liability policy does not apply to bodily injury to an employee of yours if you assume liability for that injury under a contract. In other words, if you sign a contract that qualifies for coverage under your liability policy, and you assume liability for employee injuries under that contract, you should be covered for any suits that arise out of those injuries.

Breach of Contract

Some things are also excluded if there is a breach of contract. For example, if a contractor agrees to insure a building for the property owner during construction, yet fails to do so. If the property is somehow destroyed before completion and the property owner seeks payment for the value of the property, the contractor cannot make a claim under their commercial general liability policy.

To learn more on how you can protect your business what your insurance policy covers, contact the experienced professionals at TJ Woods Insurance Company today.