Understanding Contractual Liability and the General Liability Policy

Contractual liability is a common, yet often misunderstood, facet of risk management and commercial insurance. As companies conduct business, they frequently enter into contracts that involve promises, warranties, or responsibilities. These contracts often include 'hold harmless' or indemnification clauses where one party agrees to accept the risk of loss or damage that might otherwise fall on another party.

What is Contractual Liability?

Contractual liability refers to the obligations a party assumes when it accepts the terms of a contract. These can be 'express' contracts, with specific written terms, or 'implied' contracts, which are inferred from actions or circumstances. The liability arises when a party fails to fulfill its obligations under the contract, causing harm or loss to another party.

How does the General Liability (GL) Policy Respond to Contractual Liability?

Standard GL policies usually include coverage for contractual liability. These policies typically insure "liability assumed under an 'insured contract'" and cover "bodily injury" or "property damage" that the insured becomes legally obligated to pay due to an "occurrence".

The policy definition of an "insured contract" often includes any agreement pertaining to the insured's business where they assume the tort liability of another party to pay for "bodily injury" or "property damage" to a third party.

It's important to note that not all contractual liabilities are covered under a GL policy. For instance, contracts involving quality guarantees, business performance, or financial obligations generally fall outside the scope of a GL policy.

Contractual Liability Claims Scenarios

1. Construction Project: A construction company enters into a contract with a property owner to build a commercial property. The contract includes a hold harmless clause that obligates the construction company to indemnify the property owner if a third party is injured during construction. An accident occurs, and a third party sues the property owner. The construction company's GL policy would likely respond to this claim under its contractual liability coverage.
2. Lease Agreement: A retailer leases a property for their store. The lease agreement includes a clause stating the retailer will assume liability for any customer injuries occurring on the premises. A customer slips and falls in the store and sues the property owner. The retailer's GL policy may respond to cover the lawsuit, given the indemnification clause in the lease agreement.
3. Maintenance Contract: A landscaping company agrees to maintain the grounds of a business complex and assumes responsibility for any damages caused by their services. While working, they accidentally damage a parked car and the car owner sues the complex owner. The landscaper's GL policy would likely cover this claim under its contractual liability coverage.

Understanding contractual liability and how it interacts with a GL policy is crucial for businesses. Working closely with knowledgeable insurance professionals and legal counsel can help to ensure that potential exposures are adequately addressed and insured. With careful contract review and the right insurance coverage, businesses can confidently enter into agreements knowing their potential liabilities are well managed.