Three Tips for Overcoming Contractual Liability Shortcomings
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Contractual liability is often referenced in staffing agreements. Yet, what’s intended by contractual liability and how the concept actually applies are not always perfectly aligned nor understood. I’ll explain how contractual liability coverage is granted, identify shortcomings with the coverage grant and suggest some remedies to the various shortcomings.
It’s common for a client to require a staffing company to take on the liability of the client or another party’s liability the staffing company would not otherwise have. This form of agreement is commonly known as a “hold harmless” or “indemnity” agreement.
Nearly all Commercial General Liability (CGL) insurance policies since 1986 automatically contain an exception to the contractual liability exclusion for liability assumed in a contract – as long as the bodily injury or property damage occurs after entering into the contract and the liability is assumed in a hold harmless or indemnity agreement that falls within the definition of an “insured contract”.
Coverage is “blanket” in that the staffing organization doesn’t need to list or designate the covered contracts and the coverage is generally “broad form”, as coverage applies even if the staffing company assumes liability for the sole negligence of the client. Several specific types of contracts are defined as “insured contracts”. Included in the definition of “insured contract” is that part of any other contract or agreement pertaining to your business under which you assume the tort liability of another party to pay for the bodily injury or property damage to a third person or organization.
Contractual Liability Shortcomings
Contractual liability doesn’t cover breach of contract claims or the failure to meet an agreed upon obligation. The CGL policy specifically excludes all contractual coverage, but then offers limited coverage back for assumed liability only for an “insured contract”.
Contractual liability coverage provides protection for assumed liability (agreeing to be responsible for someone else’s legal obligation to pay damages to a third party), it doesn’t provide coverage for assumed duty (obligation to act or not act).
Contractual liability coverage is further limited by the other terms, conditions, limitations, and exclusions of the CGL – it doesn’t provide coverage for “any and all claims”.
Contractual Liability Remedies
Due to the various terms, conditions, limitations, and exclusions in a CGL policy, contractual liability coverage is likely to be more restrictive than what your clients might request. Here are some suggestions on how to mitigate coverage gaps:
- Try to negotiate out broad terms such as “any and all claims”. The scope of the CGL policy does not cover “any and all claims”. Instead, replace these terms with “any and all insured claims” or something similar.
- Avoid agreeing to indemnify your client for their sole negligence. You might suggest to indemnify them for their liability except for their willful misconduct, gross negligence, and/or sole negligence.
- Limit indemnity matters to “bodily injury” and “property damage”. These are defined CGL terms. You should avoid indemnifying your client for employment practices liability, pollution and other CGL excluded items.
Contractual liability coverage provides assumed tort liability protection for many (but not all) assumed liability matters. Understanding its limitations will help you negotiate more favorable hold harmless and indemnity agreements and move you closer to eliminating coverage gaps.
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