Contractual Liability Insurance

Photo Credit: Flickr/Alan Cleaver

Of all the insurance your small business has, contractual liability insurance might be one form you don’t realize you carry. If you have a Commercial General Liability (CGL) policy, this form of insurance coverage is automatically included to appear in it, without the need for a special endorsement.

But what is contractual liability insurance and why do you need it? This insurance protects your business against loss due to liability as stipulated in a contract. The insurance covers the damage that can arise from a tort should a party be found in breach of contract. For example, a plumber enters into an agreement with a homeowner to replace a water heater. The cost of replacement, parts, and labor amounts to $800 dollars. The plumber takes a $400 retainer fee before the job starts; however, the plumber never shows up to perform the agreed upon work. The homeowner can take the plumber to court and collect the $400 down payment. In this instance, the plumber would be in breach of contract and the homeowner would have a justified contractual liability claim. There may be extenuating circumstances under which the plumber is covered by contractual liability insurance.

Because many different kinds of risks are covered under a general liability policy, bodily injury or property damage caused by direct or indirect actions of the insured may be included. For a business, especially a small business, this type of liability can be critical. It’s common for one party to take on or assume the liability of another in a business agreement. This form of coverage is designed to indemnify or “hold harmless” another person or entity for actions not specifically excluded on the insurance policy (this is why it’s often referred to as a hold harmless agreement).

You should consult with your insurance agent to find out if the contractual liability coverage you have under your CGL is applied on a limited basis or provide blanket coverage and to make sure that your business is protected.