Contractual liability insurance 101

Do you know who’s really liable if something goes wrong, and whether or not you need contractual liability insurance? We break it down.

team reviewing contracts

Contracts are a part of business. They create structures, set expectations, hedge against risks, and outline the course of action for the many circumstances any business faces. At the bare minimum, many small businesses create contracts with clients to agree on the services they’ll provide.

Whether you’re by-the-book or off-the-cuff, you may have also created contracts for the space you lease, equipment you rent, or independent contractors who help with your workflow. Whenever you sign a contract, it affects your liability in the case that something goes wrong during your business with the other signee. However, if you’re not legally savvy, your eyes might have glazed over at the contract subheading “agreement to indemnify.”

Do you know who’s really liable if something goes wrong, and whether or not you need contractual liability insurance? This short guide explains indemnity clauses, contractual liability, and the kinds of insurance that can protect you. Let’s get started.

Liability 101

In the course of running your small business, you can be found liable when things go wrong. Depending on your industry and specific services, you might be liable for claims of bodily injury, property damage, and professional negligence made by your clients or third parties.

That’s why most small business owners take out the following kinds of insurance:

General liability insurance – CGL insurance provides coverage in the case of client or third party claims of bodily injury, medical costs, and property damage

Professional liability insurance – Also called errors & omissions (E&O) insurance, this coverage protects you and your company against professional errors and negligence that result in a financial loss (for your client)

Insurance companies calculate your rate based on the risk related to your business, and can help protect against the liability you incur over the normal course of business.

However, it’s important to know that the contracts you sign affect your liability. So, do you need contractual liability insurance?

Contractual liability

When you sign a contract, whether with a client, your landlord, an event space, or independent contractor, you take on liability. Contractual liability is the liability you take on in a contract. What does this look like?

Sometimes, contractual liability is straightforward. Imagine you’re a landscape designer who has agreed to install a lawn for $1,500. You sign a contract and collect a $500 deposit. Should you get sidetracked with other jobs and fail to complete the agreed-upon work, you would contractually be liable to pay your client back $500.

Sometimes, though, contractual liability is more complicated, as it shifts one party’s liability to the other. Some contracts contain an indemnity clause. Indemnity is an agreement for one party to exempt the other from legal liability.1 When you agree to indemnify another party, you agree to take on their liability.

Say, for example, you’re a Zumba instructor holding an outdoor class in a public park. Should one of your students slip on a stray tree branch during the merengue march, landing them in an Urgent Care for a sprained ankle, would you be held liable for injury as the instructor? Or would the city be held liable as the steward of the public park?

It all depends on the contract you signed with the park when you reserved space for your event. If your contract with the city park contained an indemnity clause that transferred the city’s legal liability to you, you are now liable. While a city or municipality could be liable for injuries on public property in some cases, you took on contractual liability with the indemnity clause.

Is contractual liability covered by my insurance?

All businesses take on contractual liability, but they don’t all need contractual liability insurance. It’s important to know that general liability insurance policies contain an exclusion: they do not provide coverage for liability taken on because of a contract.

However, there are exceptions that narrow this exclusion. In fact, general liability insurance often covers contractual liability. Let’s take a look at two exceptions:

If you would have been liable even without the contract, your insurance should still cover you.

If the contract you signed qualifies as an “insured contract” under federal regulation, you should still be covered by your general liability insurance in cases where you assume someone else’s liability. Insured contracts include:

  • Leases
  • Easements
  • Agreements to indemnify (hold harmless) a city or municipality2

Back to our zumba example. As an instructor, you had an obligation to your student’s safety, barring your contract with the city. You would have been liable even with the contract, so your general liability insurance should still cover you. Beyond that, the contract you signed with the city fits the definition of an “insured contract” since it was an agreement to hold the city harmless.

Let’s take a look at one more example to better understand this point.

You’re a small furniture repair shop owner who has signed a commercial lease with your landlord. It contains an indemnity agreement holding you responsible for claims of bodily injury and property damage in your workspace. When the plumbing goes awry, you hire a plumber. He breaks a water main and your office floods, damaging a client’s antique couch.

You would not have been responsible for damage related to building maintenance unless you signed your contract (your lease). Now, you’re responsible.

However, your agreement qualifies as an “insured contract,” because it’s a lease. Therefore, your general liability insurance should still cover your client’s property damage (the antique couch).

In short, there is no need to take out specialized “contractual liability insurance.”

Rather:

General liability insurance (also called commercial general liability insurance) can help cover you for claims of personal injury, medical costs, and property damage—as long as you would have been liable anyway, or have signed an insured contract.

Professional liability insurance can protect you from claims of breach of contract.

If you’re looking for fast, flexible insurance coverage, protect your business with Thimble. Purchasing general liability insurance and professional liability insurance has never been easier: from our website or the Thimble app, enter your ZIP code, your crew size, a few details about your business, and get covered in less than 60 seconds.

With Thimble, choose between hourly, daily, or monthly policy so that you’re only insured when you need it. Whether you’re renting a space for a day or a year, Thimble can help cover you in the case of contractual liability.

Understanding your contracts and your coverage

As a small business owner, you have a lot on your mind. Between managing your projects, your finances, and your crew, you may not spend time reading the fine print of contracts. However, you can use the information from this guide to save time and reduce your liability. A few tips:

Scan your contracts for language and clauses around “indemnity.” This is where you’ll find out whether you’re agreeing to take on someone else’s liability by signing the contract.

Take out general liability and professional liability coverage to protect your business.

Check with your insurer to see if the contract counts as an “insured contract,” and whether or not it will affect your coverage.

Taking the time to understand your insurance can help put your mind at ease so you can focus on what you do best—run your business.

 

Sources:

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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DISCLAIMER: The information contained on this page is intended to provide general information only. For specific legal advice, please contact an attorney. For advice regarding your particular insurance needs, you should speak with your broker or agent to ensure that you have the appropriate coverages and limits.