Construction Contractual Liabilities

Susan Weber
Be sure you are covered against contract breaches by a third party.

Construction contractual liabilities are often covered in a contractor's general liability policy. Check the policy and the construction contract to make sure that all contractual liabilities are covered and meet the interpretations of the state in which the work is completed.

About Construction Contractual Liabilities

Construction contractual liabilities are not caused by negligence or the way the work was completed, but instead, by the contract terms not being upheld by the contractor or his/her subcontractors. For example, taking a deposit and not showing up to complete the work would be a contractual liability.

A contractor will have a variety of business insurance policies including a commercial general liability insurance policy. This liability insurance is usually written to automatically cover the contractor for contractual liability.

If a contractor is found to have not upheld a contract, the insurance coverage will pay for the damages. For example, if the contractor agrees, but does not take out special flood insurance on a building during construction, the building owner may sue the contractor for damages if the building floods during construction. The contractor would make a claim for the damages from the contractual liability insurance portion of their liability insurance policy.

Assuming the Liability

It is somewhat common in a construction contract for one party (such as the general contractor) to assume the liability of a third party (such as a subcontractor) who they bring onto the job to implement the agreement. This increases the risk for the general contractor and can be very expensive if something major happens. The contractor's standard commercial general liability policy usually covers this additional risk exposure, but there can be certain exclusions.

Sometimes a construction contract is written to exclude certain third party risks. When this is true, the building owner may not be able to collect any damages from the general contractor based on the actions of the third party subcontractor.

Variances between States

Not all states have the same interpretation of contractual liability insurance coverages. In some states, coverage for bodily injury and property damage caused by the contractor or by someone such as a subcontractor who is acting in behalf of the contractor may, or may not, be included. Or, the coverage may not apply if the other party is negligent. In other states, the contractual liability insurance may not cover any legal costs which might be incurred by the contractor or building owner to settle the claim.

Avoid Surprises: Read and Ask Questions

Contractors should pay close attention to:

  • Insurance contracts - Check with an insurance broker to make sure that construction contractual liabilities are covered in any current commercial general liability insurance policy.
  • Construction contracts - Read everything written in the contract as well any endorsements which are attached to a construction contract. Having the contract reviewed by an attorney is always a good idea in order to ensure that the contract does not leave the contractor being surprised at a later date if they are liable for actions by a third party for whom they didn't think were responsible.

Additional Resources

Construction Contractual Liabilities