Contractual liability, including endorsements and exclusions, can be a very misunderstood topic in the insurance world—especially for organizations and administrators that have to deal with these topics without having an insurance background. Throw in the complexities of insured contracts and things get even more confusing. In this article, we’ll take a closer look at contractual liability and the CGL policy and then we’ll dig into how that relates to insured contracts. First, let’s take a look at contractual liability and the CGL policy.
Defining Contractual Liability & The CGL Policy
Let’s first start with contractual liability. As a general rule, IRMI states that contractual liability (or liability because of a contract), part of a commercial general liability policy (CGL), has a very broad meaning—a promise that may be enforced by a court. IRMI shares the following simple example:
I agree to paint your house for $1,000 and collect $500 prior to the job. After I accept the $500, I obtain a more lucrative offer and never show up to paint your house. You can go to court and claim the $500 you paid me, as I have breached the contract. Your claim is a contractual liability claim.
Organizations automatically have contractual liability insurance as part of their CGL policy, which is coverage for the named insured’s liability that is created when it assumes, in an oral or written contract, the financial consequences of another’s negligent acts or omissions that results in bodily injury or property damage to a third party. This type of insurance has been automatically included in CGL policies for years.
In this type of insurance policy, there are two important parties referenced that are important to differentiate:
- The indemnitor: An individual or an organization that either verbally or via written contract assumes the obligation normally placed on a surety if the person (the indemnitee) defaults
- The indemnitee: The individual who the risk is transferred from
Contractual liability refers to the financial aspects that come from the liability; not the indemnitee’s liability. If the indemnitee accidentally or allegedly causes injury or damage to a third party, the indemnitee still remains answerable for that liability.
Finally, it’s important to keep in mind who is actually covered for this type of liability. It can be easy to confuse the terms “named insured” and “insured”. Property Casualty 360 points out that the standard ISO CGL policy refers to both terms in its contractual liability exclusion and exception, but reserves coverage to the named insured in certain circumstances of the insured contract definition. That’s why it’s important to fully understand the context of each term used, and know that sometimes there’s a difference—and sometimes there isn’t.
Hold Harmless or Indemnity Agreement
Another type of protection is the indemnity or hold harmless agreement in which the indemnitor promises to reimburse—and in some cases defend—the indemnitee against claims or suits brought against the indemnitee by a third party. The purpose of the hold harmless or indemnity agreement is to transfer the risk of financial loss from one party to another party.
IRMI explains that an important aspect of the hold harmless or indemnity agreement is that it does not relieve the indemnitee (the party with the benefit of the promise) from liability to the third party. The indemnitee may be found to be completely liable to the third party for its bodily injury or property damage. The hold harmless gives the indemnitee a legal right to collect from the indemnitor (to the extent included in the contract and allowed by law) for the damages paid to the third party. The purpose of contractual liability insurance is to pay, on behalf of the indemnitor, the damages to the third party.
Putting It All Together
There’s a lot to stay on top of when it comes to insurance and tracking, regardless of the industry you represent. There are ways to stay on top of your insurance tracking without feeling completely overwhelmed. When managing insurance and compliance, it’s best to know how to guard against liability, assess the problem and be proactive in your solutions. An insurance tracking service like myCOI can partner with you and your team to ensure that you’re always adequately protected.