Is contractual liability covered under commercial business liability insurance?


Commercial business liability insurance policies contain a clause which specifically excludes contractual liability. This means that if a business company assumes the legal liability of others by contract, the assumed liability is not covered by commercial business liability insurance.

When Contractual Liability IS Covered

There are, however, two special situations in which commercial business liability insurance can provide coverage for contractual liability:

  • When the agreement in which liability has been assumed, fits the definition of a so-called "insured contract" and has been entered into prior to the accident for which liability is claimed.
  • When the insured is liable, regardless of any agreement or contract.

Contractual Liability and the "Insured Contract"

The following special considerations apply if liability is assumed in an "insured contract":

  • Commercial business liability insurance provides broad-form coverage for contractual liability.
  • The holder of commercial business liability insurance does not need to pay a separate premium for the contractual liability coverage.
  • The contractual liability coverage has a "blanket" provision, i.e. it pertains to just about every hold-harmless or indemnity agreement in which the insured business owner has assumed the tort liability (i.e. liability imposed by civil law) of another person.

Here is a list of typical "insured contracts" commonly used in business relations:

  • License agreement;
  • Sidetrack contract/agreement;
  • Lease of premises, etc.

The prospective insured wishing to include a contractual liability clause in their commercial business liability insurance should, however, be extremely vigilant when it comes to the definition of an insured contract, for there are some noteworthy exceptions.

The following indemnity agreements do not fall into the category of "insured contract":

  • Agreements transferring the professional liability of an engineer, an architect or a surveyor to another person. What is needed in the event of similar exposures is professional liability coverage.
  • Agreements related to the liability of a railroad, in the event of causing property damage within 50 ft of the railroad property in the process of construction or demolition. A special railroad protective liability provision covers this specific type of liability.
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