Contractual Liability

Contractual liability coverage is built into the standard ISO commercial general liability policy, but many tree service owners do not realize it exists or understand how it works. When you sign a contract that includes a hold harmless agreement or indemnification clause, you are assuming financial responsibility for certain claims that might otherwise fall on the other party. Contractual liability coverage is what funds that assumed obligation.

Here is a practical example: a shopping center hires your tree service to remove dead trees from the parking lot. The contract includes a hold harmless clause requiring you to indemnify the shopping center for any claims arising from your work. One of your crew members accidentally drops a limb on a shopper's car. The shopper sues the shopping center. Because you signed the hold harmless agreement, you are contractually obligated to cover the shopping center's defense and any damages. Your GL policy's contractual liability coverage pays for this.

However, contractual liability coverage has important limits. It generally only applies to liability you would have had in the absence of the contract (the "but for" test on some forms) or to liability assumed in an "insured contract" as defined in the policy. Most hold harmless and indemnification agreements in tree service contracts qualify as insured contracts, but unusually broad indemnification provisions — especially those assuming liability for the other party's sole negligence — may fall outside the coverage.

Some E&S market policies modify or restrict contractual liability coverage through endorsement. Before signing any contract with significant indemnification obligations, confirm that your GL policy's contractual liability coverage has not been limited. If it has, you may be personally exposed for liabilities you assumed in writing.