The simple meaning of the term 'contractual liability' means the liability that o party assumes on behalf of the other party in a contract. Under contractual liability, all the claims against a business that arise due to assumption through a contract of some other person’s liability are covered. Here we will explain why businesses require this type of coverage and how is it provided and the various types of contracts that it covers.
In simple terms, contractual liability insurance is a liability that one party assumes while it signs a contract with another party. Whenever you sign a contract, you agree to perform something for someone else or you assume some liability. Sometimes you as well indemnify them or hold them harmless if something unforeseen happens. As a business, you may be entering into various contracts, like vehicle contract, lease agreement for equipment or building, employment contract, or sometimes even manufacturing contract. However, despite the reason, you must understand what you are going to sign, and what kind of liability you have taken on.
An indemnity agreement is found in most of the contracts that you sign as an owner of a business. This means that make the party completely again should there be some financial loss because of your negligence. In it, you agree that if any of your actions cause any third-party to sue the party wherein you have entered into the indemnity agreement, you would pay them back any losses that incur financially.
The contractual liability looks quite self-explanatory, but sometimes it becomes difficult to understand it. Mentioned below are some examples so that you will be able to understand when you are impacted through it:
Let us take an example, wherein you have rented some equipment from ABC Hardware like you have rented a tractor from it for your business. Consecutively, your lease with ABC Hardware contains a standard indemnification agreement in it. Suppose while using this tractor on street, it, unfortunately, hit a parked car. The owner of this car may sue not only you but also ABC Hardware as they own this tractor. Here, under contractual liability, you must have to reimburse or pay for any of the expenses incurred due to the lawsuit, defense, and damages costs. However, if you have not in any legal issue where you may have to pay for the costs of defense, be aware that it may come up very quickly. Sometimes, it ends up in thousands of rupees.
Suppose, you have signed a contract that contains the indemnification language as well with XYZ Designs. You are going to build a new structure for them for keeping their equipment. They want some electrical work inside this structure, so you made a subcontract with RS Electricals. RS is negligent to make sure a wire is out of its way and a visitor at XYZ Designs ends up tripping and was severely injured. In such a situation, you and XYZ Designs must sue RS Electricals. Due to the indemnification contract with XYZ Designs, you should pay or provide reimbursement to them for any defense or damage costs because of the lawsuit. In such a situation, you must have the same agreement with RS Electricals.
One of the best ways to reduce the risk when we talk about liability is to transfer your liability to someone else. Generally, the risk transfer is the basis of an indemnity agreement and contract. In such situations transferring the risk only transfers the liabilities from one party to another for some specific instance. This applies only for the contract’s duration and for some specific reason for the contract. One of the best ways to transfer risk is to buy the right contractual liability insurance.
To understand this, let us take an example. Mr. Brown owns a café with the name of Brown Owen at a retail space that he has taken in rent from Dream Realities. Mr. Brown has also insured his café with a general liability insurance policy.
The lease of Brown Owen’s building has a clause that needs the business of Mr. Brown to indemnify his landlord for all the claims, costs, damages, and other defense expenses that may arise from the operations of the café business in the leased place. Brown Owen is liable in the lease for any third-party claims against his landlord for property damage or bodily injury that arise during the operations of the café.
One day a customer of Brown Oven café fell due to the café's broken tile while entering. This led to a head injury. The customer sues Brown Oven Café and Dream Realities claiming that they both are liable for his head injury as they know about the broken tile of the café. The customer agrees to settle the claim at a certain amount which both the defendants agree to share.
Dream Realities agrees to pay half of the cost and then asks for reimbursement from Brown Oven Café as per the indemnity clause of the lease. Mr. Brown forwards this demand to his liability insurance provider, which reimburses the Dream Realities. The demand of the landlord is covered as it arose due to Mr. Brown’s assumptions of liability under the lease of the building for property damage or third-party bodily injury.
While most of the Contractual Liability Insurance plans cover contractual liabilities, they all have some or other exclusions. Every insurance policy has some exclusions. In contractual liability insurance, coverage for bodily injury or damage of property for which the policyholder is obligated for paying the damages by some reason of the liability’s assumptions in an agreement or contract is removed.
The Final Words!
So, in a nutshell, a Contractual Liability Insurance protects against liabilities that you may assume as a policyholder while purchasing or thinking to purchase a contract. Many insurance providers have a general liability policy that protects them from various risks that they can encounter in their everyday operations, however, these insurance plans can as well exclude coverage in some situations.