Business owners take on many liability risks. In fact, anytime they sign a contract with a third party, whether it be a landlord, employee, or equipment rental company, they agree to assume certain liabilities. The only way to be protected, both legally and finally, from the potential ramifications of these liabilities is with contractual liabilities insurance.
Keep reading to learn more about assumed liabilities and contractual liability insurance.
What does assumed liability mean?
Assumed liability refers to a liability one party agrees to take on under the terms of a contract. Within the insurance industry, there are insurance policies designed to protect businesses against losses from an assumed liability, known as assumed liability insurance or contract liability insurance (assumed liabilities are also commonly referred to as contractual liabilities).
When a company signs a contract, especially one that includes many assumed liabilities, they are put in an extremely risky position - unless they purchase assumed liability insurance, that is.
Assumed liability insurance policies legally and financially protect business owners from the liabilities they assume when signing a contract with a third party. Most commercial general liability insurance does not protect against bodily injury and property damage liability. This is why contractual liability is necessary.
With contractual liability insurance, anytime your business is responsible for a third party’s bodily injuries or property damage based on the contract terms, your insurance company would cover any claims brought against you.
Contractual liability insurance is especially important when businesses sign contracts where they assume 100% of the risk.
An example of how assumed liability insurance works is as follows: If a building company agrees to take on the assumed liability for the safety of a road they are working on, for the duration they are working on it, the company could be held liable for any injuries that occur on it.
In such an instance, it would be the building company’s responsibility to ensure the area is safe at all times. One way to do this is by purchasing assumed liability insurance to make sure they are covered should an accident occur.
Please note that assumed liability insurance is not the same as other types of business insurance. One key distinction is that contractual liability insurance only applies when there is risk transfer.
It does not cover liabilities when a business itself is the primary risk, as there are no third parties involved in such a circumstance. In this case, general liability insurance is the type of coverage needed.
It must also be noted that contractual liability insurance does not protect businesses from contract-related lawsuits. This is a common misconception given the name of this type of insurance, but the reality is that assumed liability insurance does not cover lawsuits for breach of contract or failure to adhere to certain contractual agreements, such as budgets or project deadlines.
If you aren’t sure whether assumed liability insurance is right for your company, contact BrokerLink today. One of our commercial insurance experts will be pleased to offer their unbiased, objective opinion on whether contractual liability insurance is right for your business.
Types of contracts covered by assumed liability insurance
Assumed liability insurance covers all kinds of contracts. Whether the contract is signed with an individual or business, or whether it relates to services, products, property, equipment rentals, or a company you hire to perform work on your behalf, contractual liability insurance can protect you.
At the end of the day, contractual liability is a transfer of risk that takes place when one party assumes liability on behalf of another through a contract.
Exclusions to assumed liability insurance
Assumed liability insurance policies usually come with several exclusions, though the specific exclusions vary depending on the insurance provider. If your policy features exclusions you aren’t satisfied with, you can typically negotiate with the insurer to provide additional coverage.
The importance of understanding the terms of your assumed liability insurance policy
Anytime you purchase insurance, it’s crucial to understand every aspect of your policy. Specifically, you will want to have a firm grasp of what’s covered, what’s not covered, and how that coverage is defined. Since insurance jargon can be confusing, we recommend calling a trusted insurance broker to walk you through a potential policy before signing it.
BrokerLink’s insurance advisors are always happy to provide their expertise, helping you decide whether a policy is right for your business.
What is an assumption of liability endorsement?
An assumption of liability endorsement (ALE) is a type of endorsement that can be added to your business’s commercial insurance policy. ALEs stipulate that, if the insurance company goes under, the amount of any loss that would have been recovered from the reinsurer by the insurance provider will instead be paid directly to the policyholder.
An assumption of liability endorsement may also be referred to as a cut-through or assumption of risk endorsement.
What is an indemnity agreement?
Another term you may hear in relation to assumed liability insurance is indemnity agreement. An indemnity agreement, also known as a hold harmless agreement, is a legally binding statement written in a contract that transfers liability from one party to another party.
In essence, it is an agreement whereby one party agrees to compensate the other party for the cost of any liability claims that arise from a third party, regardless of which party was at fault for the incident.
Indemnity agreements always involve two parties, the Indemnitor and the indemnitee. The Indemnitor is the party that promises to compensate the other, while the indemnitee is the party that is being compensated by the Indemnitor. Some parts of Canada have rules and regulations around the type and amount of risk that can be transferred between an indemnitee and an Indemnitor.
If your business signs an indemnity agreement, it’s important to have contractual liability insurance to protect you. Why? This type of insurance will financially protect your business in the event a third-party liability claim is brought against you.
In a situation where the Indemnitor is found to be at fault and they don’t have their own insurance, your business would have to pay out-of-pocket to cover these losses. But with assumed liability insurance, your insurance company can cover the costs up to the policy limit.
How does contractual liability insurance work?
First off, contractual liability insurance only applies when a third-party liability claim has been brought against your business. Once a claim has been filed, the Indemnitor, the party that agrees to compensate the indemnitee, can use their assumed liability insurance to pay for property damage or bodily injury losses sustained by the third party on behalf of the indemnitee, up to the policy limit.
When a business becomes involved in a third-party contractual liability claim, you would still file a claim with your insurance company. Depending on the outcome of the claim, your insurance company may cover the losses or agree to a settlement up to the policy limit.
In the event the Indemnitor is required to pay a portion of the settlement, your business would be responsible for reimbursing them since you assumed 100% of the risk according to the contract.
For example, what happens if a customer trips and falls over a loose floorboard in your grocery store. Both you and the landlord knew that the floorboard was loose, but no one ever bothered to fix it.
The customer sues your business and your landlord for the injuries they sustained, claiming it was both of your responsibilities to repair the floorboard and ensure the floor is safe to walk on at all times.
In this case, you and your landlord would each be held partially responsible for paying the customer’s medical expenses (not covered by their health insurance) and any lost wages, if their injury prevented them from working.
However, if your company signed an indemnity agreement with the landlord, your business would legally have to reimburse the landlord for the portion of the settlement they paid.
Who needs contractual liability insurance?
Since contractual liability insurance is rooted in protecting businesses from liabilities they assume in third-party contracts, any business that has contracts with other companies or individuals needs this type of insurance.
After all, third-party liability lawsuits can be expensive. Without insurance, one lawsuit could be enough to bankrupt your company. Therefore, if you run a small business that could not afford to pay for a lawsuit out-of-pocket, the more important it is to purchase assumed liability insurance.
Therefore, although assumed liability insurance is not legally required, it is highly recommended to protect your business from both a legal and financial perspective.
Examples of businesses that could benefit from contractual liability insurance include:
- Businesses that rent public retail stores.
- Businesses that rent an office space.
- Construction businesses.
- Contractors.
- Service-based businesses, such as plumbers, electricians, or HVAC technicians.
Assumed liability best practices
BrokerLink has put together a list of tips for businesses to follow before signing third-party contracts and taking on assumed liability.
- Review the insurance coverage of the companies you do business with, including the coverage of any suppliers, manufacturers, or subcontractors.
- When signing contracts with vendors or suppliers, make sure they include a provision that requires them to provide you with proof of insurance by way of a certificate of insurance. You may also wish to include other advantageous provisions, such as contractual liability and your business being added as an additional insured.
- Hire an experienced lawyer to review all business contracts.
- Provide your insurance advisors, as well as your broker, with a copy of any third-party business contracts. An insurance broker can review your contracts and let you know if there is anything in them not covered by your existing insurance policy. From there, you can purchase additional coverage or try to modify the contract so it is covered by your current policy.
Other types of business liability insurance
Beyond contractual liability insurance, there are other several types of business liability insurance that may be worthwhile for companies.
Employer liability
Employer liability coverage can protect your business if a lawsuit alleges that an employer’s negligence is responsible for a job-related injury.
Employment practices liability
Employment practices liability can protect your business from claims of wrongful dismissal, discrimination, and human rights violations relating to the hiring, promoting, and termination of employees. This is important as claims of this nature are not covered by commercial general liability insurance.
Employee benefits liability
Employee benefits liability coverage can protect your business in the event you are held liable for claims arising from the administration of your employee benefits program. For example, if a claim is brought against your company for improperly counselling plan participants, handling records carelessly, failing to enrol or terminate employees, or improperly interpreting coverage, you can be covered thanks to employee benefits liability insurance.
Directors and officers/management liability (“D&O”)
If your company has directors, officers, or a management team, separate liability protection is important. Directors and officers/management liability insurance can protect your business from claims brought against them. Claims brought by shareholders are most common, however, they may also be brought by individuals or organizations like contractors, government agencies, or public activist groups.
Legal expenses liability
Legal expenses liability is added coverage that could benefit many businesses. With legal expenses liability coverage, your insurance provider will cover the costs associated with all kinds of legal issues, from tax audits and employment disputes to statutory licence protection and physical property damage. Specifically, your insurance company would pay for legal fees, settlement costs, court fees, medical report fees, and expert witness fees.
Contact BrokerLink for more information on assumed liabilities and contractual liability insurance
Want to learn more about assumed liabilities and how contractual liability insurance can protect you? BrokerLink is here!
We are commercial insurance experts, and as such, we can answer any questions you may have relating to assumed liabilities. We can also help you find a great assumed liability insurance policy at a low rate.
When you work with us, we will take the time to understand the needs of your business. From there, we will obtain quotes from Canada’s top insurance companies, compare coverage, and unlock discounts, all in an effort to find you the best policy possible.
Contact BrokerLink to get started today. Or use our online quote tool to request a free assumed liability insurance quote now. We can’t wait to hear from you!
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