Contractual Liability Insurance: Meaning and How It Works

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Contracts play an essential role in defining the rights, responsibilities, and obligations between parties involved in numerous transactions in today’s interconnected business landscape. Nevertheless, contractual agreements can endanger businesses with possible risks and accountabilities that may arise from unexpected events or contractual breaches. To reduce these risks, businesses regularly turn to contractual liability insurance.

Contractual Liability Insurance: Meaning and How It Works

In this article, there will be an overview of contractual liability insurance, containing its definition, functioning, purpose, and a lot more. Organizations can make knowledgeable decisions to ensure smooth business operations and guard their interests by understanding the fundamentals of this specialized insurance coverage.

What is Contractual Liability Insurance?

Contractual liability insurance, also known as contract liability coverage, is insurance coverage that is naturally used by businesses that engage in or offer services through the mechanism of a written contract. The coverage protects the insured from the financial responsibilities it may assume under the contract. And that may be the outcome if an accident occurs or if the policyholder files a claim during the contractual period.

Examples of Contractual Liability

The lists below are some examples of contractual liability, and they are as follows:

  • Performance Guarantees.
  • Product Supply Agreements.
  • Construction Contracts.
  • Service Contracts.
  • Lease /Rent Agreements.
  • Non-Disclosure Agreements (NDAs).
  • Indemnification Clauses.

Now that we know some of the examples of contractual liability, let’s move on to knowing how it works.

How Does Contractual Liability Insurance Work?

Contractual liability insurance works when two or more parties enter into a contract for certain work to be completed. It provides coverage to individuals or businesses in the event of financial losses resulting from the different types of contractual liabilities mentioned above.

It is very important to know that the particular coverage, with deductibles, policy limits, and exclusions, would be listed in the insurance policy. In addition, the insurance provider may conduct investigations or need documentation to assess the legitimacy of the claim and the level of liability.

What Does Contractual Liability Insurance Cover?

However, the exact coverage may differ depending on the policy and insurer. The lists below are some common areas that contract liability coverage typically covers:

  • Breach of Contract
  • Indemnification
  • Third-Party Claims
  • Property Damage
  • Personal Injury
  • Legal Defense Costs
  • Contractual Penalties
  • Non-Disclosure Agreement (NDA) Breaches

What Does Contractual Liability Insurance Not Cover?

Like numerous types of insurance, contract liability coverage will never cover fraudulent, criminal, or intentional acts. What it covers may differ depending on the policy and insurer; the lists below are some of the common areas that contractual liability insurance typically covers. They are as follows:

  • Indemnification: This guard for liabilities arises from indemnification clauses in contracts, where one party agrees to pay off the other for damages, losses, or legal expenses.
  • Property Damage: This guards against liabilities for property damage that are caused by the insured party’s actions or negligence as drawn in the contractual agreement.
  • Legal Defense Costs: Repayment for legal fees and expenses incurred in protecting against legal actions or lawsuits related to contractual liabilities.
  • Non-Disclosure Agreement (NDA) Breaches: Coverage for liabilities arising from breaches of non-disclosure obligations or confidentiality in NDAs or similar agreements.
  • Breach of Contract: Coverage for financial losses that result from a party’s failure to fulfill contractual duties as stated in the insured contract.
  • Third-Party Claims: Coverage for settlements, legal defense costs, or judgments resulting from third-party claims arising from the insured contract.
  • Personal Injury: Coverage for liabilities connected to personal injury claims arising from the insured contract, including defamation, bodily injury, or invasion of privacy.
  • Contractual Penalties: Coverage for contractual consequences or paid damages imposed by the contract due to a party’s failure to meet exact responsibilities.

In contractual liability insurance, if the policyholder does not live up to other contractual duties among the two parties, coverage may be deprived.

Why You Might Need Contractual Liability Insurance

The following are some of the reasons why you might need contract liability coverage.

  • It provides a coat of arms for you and your business that goes beyond general liability insurance.
  • Businesses that work on a contractual basis with supplementary businesses should consider carrying contract liability coverage.
  • It keeps you safe when working directly for a homeowner or business.

The abovementioned are just a few of the reasons why you might need contract liability coverage. If you have your own reason aside from the ones listed above and you know you need it, then you can go for it.


How Much Does Contractual Liability Insurance Cost?

The average cost of contractual liability insurance for small business owners is about $42 monthly, or about $500 a year. The cost of general liability insurance, such as contractual liability, depends on a lot of factors, which are:

  • The size of your business.
  • Your location.
  • The policy limits.
  • Your claim history.
  • How do I get contract liability coverage?

A licensed insurance agent can help you find the right commercial insurance for your small business. Once you choose a policy, you can begin coverage in less than 24 hours.

Is Contractual Liability Covered by a General Liability Policy?

There are some types of contractual liability that are contained within commercial general liability insurance. But it does not cover all the risks.

What Are the Limits of Contractual Liability?

A restriction of liability clause is a clause in an agreement that limits a company’s financial exposure on the occasion of a lawsuit or another claim.