Contractual liability concerns accepting grey-area responsibility through agreements with other business stakeholders.
Standard liability policies typically exclude damages that result from the insured's agreement to accept liabilities through certain contracts, such as hold-harmless or indemnity agreements.
To have those contractual obligations treated as covered general liability claims, the insured usually must pay a premium to remove the exclusion.
Keeping the contractual-liability exclusion in the policy does not stop a court from finding the insured responsible when the insured would be liable even without the contract.
Removing contractual exclusions does not erase other general-liability exclusions; for example, a contract that anticipates bodily injury is not made insurable simply by buying back the exclusion.
It is complicated. Certain contracts fit the definition of insured contracts under standard CGL language:
Examples of insured contracts under standard CGL language
- Real estate leases (except indemnification clauses for fire damage, which must be insured through property coverage).
- Railroad sidetrack agreements.
- Easement or license agreements (except construction or demolition within fifty feet of a railroad track).
- Contracts with municipalities.
- Elevator maintenance agreements.
- Blanket tort liability, as opposed to warranties or guarantees.
Some companies remove the blanket terminology to limit contractual liability and narrow their exposure.
Legal fees and costs are usually part of the limit of liability under contractual liability unless the insured would have been held responsible in the absence of the contract; in that case, legal fees and costs are often covered in addition to the limit.
As business practices became more contract-oriented, the contractual-liability clause has been modified multiple times and can be difficult to interpret in modern contracts.
For a clear overview of policy language and options, see Contract Liability Insurance (Contractual Liability).
Industry or occupation-specific examples may use different wording; for an example of blanket contractual wording in a specific context, see Truck Dealerships Blanket Contractual Liability.
Seek advice from your attorney and insurance agent when contemplating agreements that transfer liability, since these scenarios are complex under general liability policies; you should also ask your agent to review any proposed indemnity or hold-harmless language.
Frequently Asked Questions
What is contractual liability coverage?
Contractual liability coverage addresses liabilities the insured agrees to assume under a contract when those obligations fall within policy language that makes them insurable.
When is contractual liability excluded from a CGL policy?
Standard CGL forms exclude liabilities the insured assumes under certain contracts unless the policy specifically buys back that exclusion or the contract falls within a defined "insured contract" exception.
Can a business purchase coverage for contractual liabilities?
Yes, many insurers offer endorsements or endorsements to remove the contractual-liability exclusion for a premium, subject to the policy's terms and other exclusions.
How do legal fees affect limits under contractual liability?
Legal fees are generally part of the policy limit under contractual liability unless the insured would be liable even without the contract, in which case fees may be covered in addition to the limit.