Contractual Liability
CGL coverage for liability the insured assumes under a contract, such as indemnification obligations in a lease or subcontract agreement.
What It Is
Contractual liability coverage is the CGL policy's response to liability that the insured assumes under a contract or agreement. The standard ISO CGL policy contains a broad exclusion for contractual liability (Exclusion b), but then carves back coverage for liability assumed under an "insured contract."
An insured contract is defined broadly in the CGL policy to include leases of premises, sidetrack agreements, easement agreements, indemnification of a municipality required by ordinance, elevator maintenance agreements, and — most importantly — any contract or agreement pertaining to the insured's business under which the insured assumes the tort liability of another party.
This last category is what makes the CGL policy work as a risk transfer tool. When a subcontractor signs an indemnification agreement promising to hold harmless a general contractor, the CGL policy's contractual liability coverage is what funds that indemnification obligation if a covered claim arises.
Why It Matters for Brokers
Contractual liability coverage is the foundation of risk transfer in commercial insurance. Without it, indemnification clauses in contracts would be empty promises — the insured would have to pay out of pocket to fulfill indemnity obligations. Brokers must verify that the contractual liability coverage has not been restricted or excluded by endorsement. Some carriers add endorsements that limit contractual liability to specific named contracts, which can create significant gaps.
Real-World Example
An electrical subcontractor signs a subcontract with a broad-form indemnification clause requiring the sub to indemnify the GC for any claims arising from the sub's work, including the GC's own partial negligence. A worker is electrocuted due to both the sub's faulty wiring and the GC's failure to de-energize the circuit. The claim settles for $1.8M. The sub's CGL policy, through the contractual liability coverage, pays the sub's indemnification obligation to the GC — covering the GC's allocated share of $900,000 in addition to the sub's own $900,000 share, up to the per occurrence limit.
Common Mistakes
- 1Assuming the CGL policy covers all contractual liability when it only covers liability assumed under an 'insured contract' as defined in the policy.
- 2Not checking for endorsements that restrict contractual liability coverage to specific named contracts or eliminate it entirely.
- 3Failing to recognize that contractual liability coverage applies to tort liability assumed under contract, not to breach-of-contract claims themselves.
How brokerageaudit.com Handles This
Policy Checker scans for any endorsements that modify or restrict the standard contractual liability coverage and flags them as critical coverage changes. It identifies limitation endorsements that narrow the insured contract definition. Submission Intake includes contractual liability coverage confirmation as a standard element in quote comparison worksheets for commercial accounts.