What Is Contract Liability Insurance?

Contract liability insurance is a type of insurance designed to protect businesses from financial loss due to contractual obligations. It provides coverage for breach of contract claims, which protect the insured from lawsuit stemming from failure to meet contractual obligations. The insurance protects a business from the costs associated with a legal dispute or settlement.

How Does Contract Liability Insurance Work?

Contract liability insurance covers costs associated with claims arising out of contracted services. It covers expenses incurred due to lawsuits or settlements, which may include attorney fees, court costs, and damages awarded to the plaintiff. Rule changes, contract re-negotiations, or default on payment may also be covered. Contract liability insurance is typically purchased by those businesses that enter into contracts, such as freelance contractors, subcontractors, builders, vendors, designers, and architects.

Examples of Contract Liability Insurance Claims

For example, a business enters into a contract with a vendor to supply a product for a project. If, due to a breach of contract, the vendor fails to provide the product on the agreed upon date, the business could file a claim under their contract liability insurance policy. Another example is if a business hires a contractor for a project, and the contractor fails to perform the duties specified in the contract. In this case, the business may use their contract liability insurance to cover costs associated with any legal fees or damages that may arise from the dispute.

What to Consider When Purchasing Contract Liability Insurance

When purchasing contract liability insurance, it is important to consider the types of contracts with which your business is involved. It is also important to have a comprehensive understanding of the terms and conditions of the policy before signing a contract. Many policies may have exclusions, such as those related to negligence or breach of contracts. It is also important to understand the limitations of the policies, as these will affect your coverage.