Contractual Liability Insurance

Summary: This article discusses the meaning of contractual liability, who the common parties are, and the policy mechanics. Also explored are what an “insured contract” entails, as well as the nature of contracts that do not qualify for purposes of contractual liability coverage under the CGL policy, and the reasons.

Topics Covered:

The mechanics of contractual liability coverage

Restrictions on liability assumed—exceptions

Lease of premises

Easement or license agreements

An obligation required by a municipality

Sidetrack agreement

Elevator maintenance agreement

Tort liability contractual assumptions

Mutual or reciprocal agreements: involve tort liability or not?

The meaning of tort liability

What “insured contract“ does not include

When a contract must be executed

The Mechanics of Contractual Liability Coverage

When the Insurance Services Office (ISO) introduced the “plain English” approach to its commercial general liability provisions in 1986, many of the coverage concepts were taken from earlier policy provisions, but worded in a more simplistic way. One of these coverages was contractual liability.

Contractual liability insurance can be defined as 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. To better understand contractual liability coverage as provided by a CGL policy, it is good to have some knowledge of the mechanics required. First, apart from the insurer and the claimant, there are two important parties: the indemnitor and the indemnitee. The indemnitor is the one who agrees to hold harmless the other party who is referred to as the indemnitee. (One way to distinguish between these two parties is to refer to the letters “o” and “r” and remember that the indemnitor has to agree to take the assumption “or” not be hired for the job by the indemnitee.)