Contractual Liability

As far as the insurance industry and the law are concerned, a business entity (sole proprietor, partnership, limited liability company, corporation, etc) is the same as a person. A business is held both civilly and criminally accountable for its actions and for actions that occur on behalf of a business. In other words, a business that harms another party or damages/destroys another's property may be sued or prosecuted.

For larger businesses, the insurance coverage that protects against liability to third parties is a Commercial General Liability policy. This policy is designed to take care of the business that is described within the policy and its ability to do its job is complicated when the insured business voluntarily agrees to take over someone else's responsibility. When this agreement is in writing, it is referred to as contractual liability.

Contractual liability throws the CGL for a loop. The policy's design and cost is based on the assumption that it only has to concern itself with the party that is listed on the policy. Taking on some other business' liability means that the policy is being asked to either defend or pay for the injuries or damages caused by an entity that it doesn't "know" and isn't getting money for that opportunity. A company that decides to step-in for another company has to make sure that it can arrange insurance to handle a loss it has assumed. It may try to take care of the situation by endorsing (changing) its CGL by adding the name of the other party as an additional insured. Or, when the insured company is a property owner and the other party is a contractor, the property owner may buy one special form of coverage called Owners and Contractors Protective Liability.

Of course, regardless the coverage arrangement that is attempted, it doesn't mean that every situation will be covered. You need to read the CGL policy (including any endorsement form) or Owners and Contractors Policy language to determine what situations are insured. Typically, a covered event has to involve a type of loss that the policy protects against and the persons involved must have a certain arrangement with the party that is insured by the policy. For instance, if someone sues you because your temporary business partner's employee hits them with a company truck, the policy won't help. A CGL doesn't cover auto-related losses. Let's say you own a printing company and you, in writing, agree to cover your friend's plumbing business if they are sued by a customer. Neither a CGL nor an OCP would help, because the written agreement has no relationship to your operations.

You should discuss your business relationships with an insurance professional in order to be sure that you, your business and your related liability are handled efficiently and economically. This often means that the best strategy is to have every party take care of their own insurance needs.

COPYRIGHT: Insurance Publishing Plus, Inc. 2004

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