Contractual liability insurance protects business owners against the financial consequences of liabilities they assume when entering into a contract. Whenever you sign a contract, it means that you may have financial consequences (in addition to your legal obligations) if something goes wrong while you do business with the other signee. Contract liability insurance safeguards you against the risk that these liabilities entail.

We’ll cover indemnity clauses, contractual liability, and when you should consider buying contractual liability insurance.

What is contractual liability insurance?

You take on some liability (potential financial obligation) every time you sign a contract, whether with a client, your landlord, an event space, or an independent contractor. Contractual liability insurance can provide your legal defense and help pay the settlement costs if you are named in a claim or implicated in a lawsuit that stems from your involvement in the contract.

Contractual liability explained

Sometimes, contractual liability is straightforward. For example, 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. If you were to get sidetracked with other jobs and fail to complete the agreed-upon work, you would be liable to refund the $500 deposit.

In other cases, contractual liability is more complicated, as it shifts one party’s liability to the other. Some contracts contain an indemnity clause (an agreement to “make the other contractual party whole”). This means that you will indemnify your contractual partner for liability involving your work or product.

Here’s another example. Say you’re a fitness instructor holding an outdoor class in a park, which is accessible by walking down an old and poorly maintained sidewalk. One of your students trips on a crack in the pavement and sprains an ankle, landing them in Urgent Care. As the instructor, would you be held liable for injury? 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.

What does contractual liability insurance cover?

Contractual liability insurance covers the financial risks associated with the liability you assume when you sign a contract. All businesses take on contractual liability, but they don’t all need contractual liability insurance.

If you assume liability only when signing the contract, contractual liability insurance covers the financial risk you take on when entering into an agreement with another party. For example, if you’re a photographer who signs a contract to complete a photography project and you fail to follow through, contractual liability insurance would provide coverage for a breach of contract, but general liability insurance would not.

Contractual liability insurance vs. general liability insurance

There are instances when general liability insurance is enough to cover you. While some general liability insurance policies contain an exclusion stipulating that they do not provide coverage for liability taken on because of a contract, there are exceptions that narrow this exclusion.

Specifically, if you would have been liable for the injury or damage to another party 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

For example, let’s say 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 (until you accepted responsibility for building maintenance in 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” in this case.

General liability insurance with Thimble

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 contractual fine print. However, you can use the information from this guide to save time and reduce your liability. Taking the time to understand your insurance can help put your mind at ease so you can focus on what you do best — running your business.

Thimble offers fast, flexible general liability insurance that will have you covered in just a few minutes. Purchasing has never been easier. Just go to our website or the Thimble app, enter your ZIP code and answer a few questions about your business. You can have an insurance policy in about as much time as it takes to write your signature.