Contractual Liability Exclusion

Under the Bodily Injury and Property Damage Liability Coverage, every general liability policy contains contractual liability exclusions. The exclusion applies to bodily injury or property damage for which the insured is obligated to pay damages because of the assumption of liability in a contract or agreement. However, it is important to point this exclusion contains two exceptions. Also, the contractual liability exclusion is the subject of numerous debates and lawsuits. So, if you have any questions on how this exclusion may respond to your policy, please contact our office.

Exception 1: Liability the insured would have in the absence of the contract

The policy covers bodily injury or property damage for which you would liable if the contract did not exist. For example, suppose that you rent a forklift from an equipment rental company. You are using the forklift to move some crates outside your warehouse when you accidentally hit a truck belonging to your next-door neighbor. You have probably signed a rental agreement that imposes some liability on you for damage you cause to the forklift and other property. Regardless of the rental agreement terms, you are legally liable to your neighbor under common law for the damage you have caused to his truck.

Exception 2: Liability assumed under an insured contract

The policy also covers liability assumed by an insured under an insured contract if the injury or damage occurs after the contract has been executed. The insured contract is a defined term in the policy. Insured contracts are covered as an exception to the exclusion. Thus, you are automatically covered for any contract you engage in during the policy period that meets an insured contract's definition.

Note that contractual liability applies only to bodily injury or property damage. If you assume liability under a contract on behalf of someone else for claims that allege personal and advertising injury, the claims will not be covered under your liability policy. Contractual liability is specifically excluded under personal and advertising injury liability coverage (Coverage B).