What is contingent liability?


Contingent liability arises when a business owner is held liable for the bodily injury, property damage or personal injury, which has been directly caused by another party the business owner happens to be in contractual relations with. Contingent liability, also referred to as indirect liability, is one of the general liability exposures that business owners face while running their company.

When Contingent Liability Arises

The owner of a company can be held liable for their indirect involvement in an incident resulting in bodily, personal or advertising injury, or property damage. If a third party has suffered as a result of the actions of the business owner's contractors, subcontractors, employees or agents, the business owner is likely to be held liable together with the party which has primarily been responsible for the incident.

Here is a hypothetical case of contingent liability:

Imagine that a big hotel chain has hired a contractor to build a hotel at a new location. Due to the building company's negligence, a random person is injured while walking past the construction site. The injured person will file an insurance claim in court against the construction company but the hotel chain may also be held liable for hiring the contractor.

If a business company has hired an independent contractor, the company cannot be held liable for the independent contractor's operations unless:

  • The operations that the business company has hired an independent contractor to perform, are illegal;
  • The operations a contractor has been hired to do, are inherently hazardous;
  • Authority cannot be delegated because of the nature of the job.

How to Insure Your Business against Contingent Liability

Since every business is exposed to the risk of contingent liability, it is of considerable importance for each business owner to carry adequate insurance. The remedy comes in the form of a commercial general liability policy which provides coverage against all kinds of general liability loss exposure. You should be looking for the Owners and Contractors Protective Liability coverage form which is specifically designed for businesses working with independent contractors.

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