What Contractors Need to Know About Contractual Liability Coverage

What Contractors Need to Know About Contractual Liability Coverage

A common misconception in construction insurance is that coverage required by contract is automatically provided by the insurance policy. In reality, contractual requirements, certificates of insurance, and policy language are separate, and understanding those differences can be critical when a claim occurs. 

A notable Texas Supreme Court decision highlighted an important issue: if a contractor agrees by contract to assume certain liabilities, a standard Commercial General Liability (CGL) policy may not automatically cover those obligations. In that case, the contractor ultimately faced a $6.2 million out-of-pocket settlement after discovering that the coverage they believed existed was not included under the policy as written—even though the former insurance agent involved issued a certificate of insurance which stated the coverage was included. 

We regularly review prior and existing CGL policies for new clients, prospective clients, and subcontractors who work for general contractors, and are often surprised by how many companies assume they’re properly covered for contractual liability simply because the coverage is required under a contract, or because they believe a standard Commercial General Liability policy automatically provides it. Many tell us, “The certificate of insurance shows the coverage,” or, “We are covered by an additional insured endorsement.” Unfortunately, a closer review often reveals that the policy contains a contractual liability exclusion and other costly gaps in coverage that may not become apparent until a claim is filed. 

When evaluating contractual liability exposure, contractors should look at three separate documents: 

1. The Contract or MSA 

Review the indemnity provisions and determine exactly what liabilities your company is agreeing to assume. 

2. The Certificate of Insurance (COI) 

A certificate is evidence that a policy exists, but it is not the policy itself and generally does not modify coverage. 

3. The Actual Insurance Policy 

Review the policy’s exclusions, endorsements, and contractual liability provisions. This is the document that ultimately determines whether a claim is covered. 

Here are some important questions to ask before signing a contract: 

• Does the policy’s contractual liability coverage align with the indemnity obligations in the contract? 
• Are the required additional insured endorsements actually included? 
• Does the umbrella policy follow form over the underlying coverage? 
• Are there exclusions that could create a gap for the type of work being performed? 
• Has the contract been reviewed for obligations that may be broader than the insurance coverage available? 
• How is liability impacted by subcontractors? 

At SWZ Insurance, we work with contractors, general contractors, roofing contractors, framing contractors, and other trade professionals to evaluate how their insurance programs align with the contractual requirements they encounter in the field. Our focus is on helping clients understand potential coverage gaps before a claim occurs. 

Not sure whether your insurance program aligns with your contractual obligations? We can help. Contact SWZ Insurance for a comprehensive review of your current coverage, contracts, and insurance requirements to identify potential gaps before they become costly claims.