Contractual Liability Insurance

What is 'Contractual Liability Insurance'

An insurance policy that protects against liabilities that the policyholder has assumed from entering into a contract of any nature. Contractual liability insurance indemnifies the policyholder from liabilities that may be expressly stated in the contract, or may be implied by the nature of the obligations listed in the contract.

BREAKING DOWN 'Contractual Liability Insurance'

A common phrase found in contracts states that one party agrees to hold another party harmless for any injuries, accidents, or losses that occur while the contact is in effect. For example, a construction company working on a city government building may be required to hold the city harmless if someone were to be injured on the construction site. The construction company has agreed to assume liability and indemnify the city. A contractual liability insurance policy would protect the contractor from losses that the building contract protects the city from.

Indemnification agreements are common additions to real estate contracts, such as one between a lessor and lessee. A business that rents an office in a strip mall has to sign a lease contract, and the lease will likely state that the business has to hold harmless the landlord from losses, damages, and other liabilities that may occur as a result of the actions (or inaction) of the business.

Many companies have general liability policies that protect them from many risks that they face in day-to-day operations; however, these policies may exclude coverage in some instances. Such an exclusion may apply to contractual liability, since this type of liability has been added to the overall risk profile of the company and may not have existed had the company not agreed to the contract. An exception to a general liability policy’s contractual liability exclusion would also include a liability assumed under an insured contact. A contractual liability insurance policy fills the gap created by the commercial general liability insurance policy’s exclusion.