Contractual liability, in simple terms, is liability that is assumed by one party by signing a contract with another. Any time you sign a contract, you agree to do something for someone else or assume liability. More often than not, you also agree to hold them harmless and indemnify them should anything unforeseen happen. As a business, you will be entering into many types of contracts, whether a lease agreement for buildings or equipment, vehicle contracts, employment contracts, or even manufacturing contracts. Contractual liability is automatically covered under a standard ISO Commercial General Liability (or CGL) policy. Regardless of the reason, you should understand what you are signing, and what type of liability you have taken on.

While contractual liability seems to be pretty self-explanatory, here are a few examples so that you can understand when you are impacted by it:

Lessor/Lessee - Let's say you rent a piece of equipment from Martins Hardware, a tractor. You sign a lease with Martins that has a standard indemnification agreement within it. You are using it on a job and need to cross the street, and unfortunately, you hit a parked car with it. The owner of the parked vehicle can sue not only you but also Martins since they own the piece of equipment. The contractual liability here is that you will have to pay for or reimburse any expenses he incurred due to the lawsuit, damages and defence costs. If you have not been in a legal situation where you had to pay for defence costs, be aware that it can stack up very quickly. Often, it ends up in the tens or hundreds of thousands of dollars.

Contractor/Subcontractor - You have signed a contract, of course including the indemnification language, with the project owner Smith Designs. You are building a new structure for them to house their equipment. They need some electrical work inside, and so you subcontract with Miller Electrical. Miller is negligent in making sure a wire is out of the way, and a visitor ends up tripping and getting severely injured, suing Miller, you, and Smith Designs. Because of the indemnification agreement in the contract with Smith Designs, you must pay, or reimburse them, for any damages or defence costs as a result of the lawsuit. Hopefully, you had the same agreement with Miller Electrical

Contractual liability, in simple terms, is liability that is assumed by one party by signing a contract with another. Any time you sign a contract, you agree to do something for someone else or assume liability. More often than not, you also agree to hold them harmless and indemnify them should anything unforeseen happen. As a business, you will be entering into many types of contracts, whether a lease agreement for buildings or equipment, vehicle contracts, employment contracts, or even manufacturing contracts. Contractual liability is automatically covered under a standard ISO Commercial General Liability (or CGL) policy. Regardless of the reason, you should understand what you are signing, and what type of liability you have taken on.

While contractual liability seems to be pretty self-explanatory, here are a few examples so that you can understand when you are impacted by it:

Lessor/Lessee - Let's say you rent a piece of equipment from Martins Hardware, a tractor. You sign a lease with Martins that has a standard indemnification agreement within it. You are using it on a job and need to cross the street, and unfortunately, you hit a parked car with it. The owner of the parked vehicle can sue not only you but also Martins since they own the piece of equipment. The contractual liability here is that you will have to pay for or reimburse any expenses he incurred due to the lawsuit, damages and defence costs. If you have not been in a legal situation where you had to pay for defence costs, be aware that it can stack up very quickly. Often, it ends up in the tens or hundreds of thousands of dollars.

Contractor/Subcontractor - You have signed a contract, of course including the indemnification language, with the project owner Smith Designs. You are building a new structure for them to house their equipment. They need some electrical work inside, and so you subcontract with Miller Electrical. Miller is negligent in making sure a wire is out of the way, and a visitor ends up tripping and getting severely injured, suing Miller, you, and Smith Designs. Because of the indemnification agreement in the contract with Smith Designs, you must pay, or reimburse them, for any damages or defence costs as a result of the lawsuit. Hopefully, you had the same agreement with Miller Electrical