Contractual liability insurance

Contractual liability insurance helps protect your business against risk you assume when entering into a contract.

Contractual liability and hold harmless agreements

When you sign a contract to work with someone else, you assume some liability for their work on their behalf. Contractual liability insurance is coverage that helps you out when the contract you enter has a “hold harmless” clause. A hold harmless agreement or indemnity agreement basically means that if something happens while under contract, you’re responsible, not them. It’s a risk management tactic that protects the person issuing a contract from liability claims and financial losses. For example, say you’re a plumber working under a general contractor and signed a subcontractor contract with a hold harmless clause. If you break a pipe that results in significant water damage to the property, your plumbing business, and only your business, will be liable for the damages, defense costs and any resulting lawsuit. Even if the property owner sues the general contractor, a hold harmless clause means you’ll have to pay for the contractor’s legal fees and any damages awarded in the lawsuit. So this basically means that when you enter into a contract, you assume all of the risk that’s associated with your work while the general contractor assumes zero. This is where a contractual liability coverage comes in handy.

Why you might need contractual liability insurance

Any business that works on a contractual basis with other businesses should consider carrying contractual liability insurance. It adds a layer of protection for you and your business that goes above and beyond general liability insurance. A commercial general liability policy protects you when working directly for a homeowner or business. It helps you pay expenses if you’re held responsible for injuring someone (bodily injury) or property damage. For example, if a homeowner hires you to perform a plumbing repair and you break a pipe that damages the homeowner’s furniture, your general liability coverage would likely step up and pay for the damage. However, most general liability policies will exclude coverage when you do contract work for a third party, especially when the contract has a hold harmless clause. If your contract includes a hold harmless clause, you may no longer be protected by your general liability coverage.

What are a contractual liability riders?

• When you buy auto insurance and your insurer offer 24/7 roadside assistance for a small fee, that’s a rider on your auto policy.
• If you live in an area known for earthquakes or hurricanes, you might have purchased riders for these disasters on your homeowners policy.

Likewise, you can add a contractual liability rider to your general liability policy. These riders come in two flavors:

• Blanket contractual liability rider. A blanket rider covers every contract you enter into. All new contracts you sign are automatically covered. While this is super convenient, it can be expensive, which is why there’s also a:

• Standard contractual liability rider. A standard contractual liability rider requires you to list every contract you want covered by the endorsement. This rider is less expensive than blanket coverage and a good choice if you only do contract work for a select group. The clear downside to this type of rider is that if you accidentally forget to add a contract to the policy, there will be no coverage for it.

Here’s the bottom line: when it comes to small business insurance, you need to know when you’re covered and what you’re covered for.

If you enter into a contract with a hold harmless clause, the insurance you’re carrying might not apply. That’s when contract liability insurance or contract liability riders can step up to keep your business moving to the next level.

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