When a small business owner or contractor inks a contract with a customer or another organization, they’re assuming responsibility for any claims for damage and loss that may arise. In essence, it puts the onus on you to pay the cost of a claim as per the terms of the contract you sign.

That’s why it’s vitally important to have contractual liability business insurance. Otherwise, should something go wrong and the property is damaged, or someone is injured, the business owner or contractor is financially liable to pay those expenses.

A small business owner signing a contract.

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What Does Contractual Liability Insurance Do?

Contractual liability insurance is your financial backstop for dealing with third-party bodily injury or property damage claims. It’s designed to cover those costs, so you don’t have to pay for it out of your pocket.

For example, if a general contractor signs a contract with a property owner to renovate a building, that contract will state the contractor assumes the financial responsibility to pay for any third-party bodily injuries or property damages that occur while the renovation work is underway. In such an instance, the contractor provides the property owner with an indemnity agreement (also known as a “hold harmless” agreement) that states the contractor will pay for losses without holding the property owner liable.

Or, if a retail business owner rents or leases a commercial property, the rental or lease contract they sign requires the retailer to shield the commercial property owner from financial losses due to third-party bodily injuries or property damages.

What Are the Limitations of Contractual Liability Insurance?

Usually, commercial general liability (CGL) insurance covers an insured or policyholder for third-party bodily injury or property damage claims, but not all CGL policies include coverage for any common business contracts you sign.

However, you can add an endorsement to your CGL policy to include contractual liability, and you’re required to include the business contracts you sign to be protected by your insurance provider. That is what’s known as a standard contractual liability endorsement. 

If you want to include an endorsement to cover all contracts your business signs, you’ll need what’s known as a blanket contractual liability endorsement. A blanket contractual liability endorsement tends to cost more than a standard endorsement. But it also spares you from having to list every contract you sign with your broker or insurance provider.

Also, there are limitations or exclusions in any contractual liability insurance policy. For instance, if you fail to meet your obligations in a contract you sign, which is akin to failing to provide a service as promised, contractual liability insurance won’t cover those expenses if your client sues you. For that, you need professional liability insurance.

Furthermore, a contractual liability insurance policy will have a coverage limit. Like any insurance policy, there are limits to how much of a payout you or a loss payee listed on your policy will receive.

That’s why working with a licensed business insurance broker is critical to ensure you are adequately protected from the liabilities you assume and the risks you face.

Getting the Contractual Liability Protection Your Small Business Needs

Fill out an online application with Zensurance for a free quote for the business insurance protection you need. 

Through our network of over 50 Canadian insurance providers, our savvy insurance experts can find and customize the policy you need to suit your business or profession at an affordable price and provide you with the guidance and perspective you need to grow your business.

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About the Author: Joe Sarraino

Joe Sarraino is a Team Lead, Contractors, at Zensurance.