Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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contract liability insurance

Insurance for contract liability plays a key financial protection in the business world.

However, because it’s not well understood outside of business agreements, particularly with larger-size companies, many people don’t really know what’s involved with this type of business coverage.

If you are looking to save money and find the best possible rates on business insurance, then compare quotes online  right here. Simply enter your zip code above to compare rates among the top insurance companies in the country!

Contract Liability Defined

Contract liability involves the risk and responsibility a party takes on when it agrees to a contract. Each party in the agreement has obligations and duties that need to be performed.

If the party reneges on the agreed terms, the remaining parties can sue for lack of performance or breach of contract. In some cases, the remaining parties may have already spent money on activities anticipating the contract occurring as planned. These costs can also be included in the liability as a result.

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Liability Coverage

Because contracts essentially involves terms of an agreement, the parties bound by it try to make sure the contract reflects their best position before it is signed. Once executed by signature, the contract terms become the rule of behavior for the parties involved. However, even with the best written contracts, parties can still have disagreements and not perform their part as expected.

In such instances, in anticipation of related lawsuits, liability coverage can be taken out with an insurance provider to create a financial safety net in case of legal action. Doing so protects a party to the agreement, allowing him to continue doing business instead of being bankrupted by a claim.

General Liability Coverage vs. Malpractice

malpractice insurance

Contractual liability coverage is intended to provide a business general contract protection. It is not intended to address protection for activities or services that require a certified level of expertise, such as the medical work of a doctor or the legal work of a lawyer. In such instances, malpractice coverage provides the specific insurance protection a certified expert might need for his work with clients.

The difference tends to have a lot do with the size of legal claims involved. Contractual liability can be limited to the value of a contract and no more. The courts don’t generally provide punitive damages for contract breach except in cases of intentional fraud.

However, in malpractice, where expertise is involved, punitive damages can be applied and cost in the millions of dollars. As a result, insurance providers treat expert work far differently than general business contracts.

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Protection Provided

The insurance for contracts will focus on the exact value and worth of the contract. For instance, if a contract involves the fabrication of 1,000 pairs of shoes, one party will pay $20,000 for the order while the other will pay all the resources to make the shoes and then sell them in exchange for the payment. So in this respect, the value to both equals $20,000 respectively. A given insurance policy would then insure one of the parties for $20,000, depending who took out the coverage.

The premium charged would be based on the value total, the duration of the contract, and the risk involved that could cause the contract to fail. Riskier agreements will, obviously, cost more to insure. Reasons for higher cost, for example, could include contracting with a party overseas in a country with lax contract laws for enforcement.

Once the insurance policy price is confirmed, the policy will protect the insured party from being sued by the agreements other parties in case of contract breach or failure. The insurer essentially indemnifies or “holds harmless” the insured party, directly providing the legal defense and settling claims financially if necessary or going to court.

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Voiding a Policy

Insurers will not protect or cover a client who violates a federal or state law or intentionally breaches a contract in fraud. Many insurers include clauses in their insurance policies to exempt such actions and waive the coverage if the crime or fraud is found out. In such instances, injured parties then can sue the perpetrator directly to recover losses. In some cases, courts even allow damages to go after the people involved with a business who made the decision to breach, seizing personal property as recovery.


When the contract covered is completed, contractual liability insurance generally ends coverage. Only where a contract party comes back after the fact arguing the contract was not performed as expected does the coverage still apply. In most cases, contracts require acknowledgment of satisfaction to end the agreement. Once documented, the related policy automatically terminates as the agreement period has expired. This limits the insurer’s risk and avoids open-ended coverage.

Where to Buy

General contractual liability insurance can be found by comparing insurance providers who are focused on business insurance versus individual coverage. Because each business client has specific needs and contract vary from agreement to agreement, standardized products don’t work well. Consumers will need to make contact with insurance agents and work through the details to get a quote for their needs. Once a customized package is built for a given contract, then the agent can price it for the business customer.

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Comparison Shopping

Customers are best served with research and comparison shopping which can then open communications with specific insurance agents. Internet comparison sites offers a wide array of immediate quotes that can begin discussions for specific policies. With the submission of initial information, customers can then be connected with agents for followup. Such personnel will be experienced with the nuances and pitfalls of specific business contract types, being able to craft coverage policies suited to the needs at hand.