Boston Business Watch: Contractual Liability Exclusions in Corporate Contracts

Small business owners must enter into every contract with caution, making sure to have each line carefully reviewed by an experienced Boston business lawyer. Failure to do this can result in situations where the firm or even the individual owner is held liable in costly negligence or injury actions they might otherwise have been able to avoid. boston.jpg

In the corporate world, many contracts include contractual liability exclusions. This often pertains to the insurance world, but not always. In general, contractual liability (or quite literally, liability because of a contract) has a very broad meaning. It is a promise that can be enforced by the court. It creates liability where none existed.

So with regard to insurance, the insurance firm agrees that for a regular fee, they will reimburse and in some cases defend the business from claims or lawsuits brought by third parties. The insurance firm agrees to assume liability.

But this isn’t the only example. Another situation we see a lot is in the form of landlord-tenant agreements. It’s common language in lease agreements for tenants to agree to hold landlords harmless for damages, liability or expenses occasioned or claimed by reason of neglect or negligence on the part of the tenant’s employees, visitors or contractors.

So for instance, let’s say you run a sandwich shop in a mall and you are having electrical issues. You hire an electrician to fix the problem. The electrician does poor work. The following year, you have moved to a new location outside the mall. A new tenant is renting your old space. One of their employees receives a serious electrical shock while using an outlet. It’s later determined that the faulty wiring was to blame.

The injured employee files a negligence lawsuit against the landlord, demanding to receive compensation for those injuries. The allegation is that the landlord breached his duty to properly wire the building. The landlord may be found liable to pay $100,000 in compensatory damages, but as you, the tenant, had agreed to hold harmless the landlord. You are instead the one who holds contractual liability.

Normally, you would have had no obligation to that injured worker. But because of the contract signed with the employer, you do – and it will cost you $100,000.

It’s for this reason that small businesses can and should explore securing contractual liability insurance, which would cover such expenses. However, even these contracts must be reviewed with experienced legal counsel.

The case of Ewing Constr. Co., Inc. v. Amerisure Ins. Co., reviewed recently by the Texas Supreme Court, illustrates the point. The case was important because Texas decisions frequently influence other courts across the country.

The ultimate outcome here was that the court denied an insurance firm’s attempt to avoid paying a claim simply based on language found in so many commercial general liability insurance policies.

The case stemmed from a construction company’s contract with a school district to build a tennis court. The construction company then hired a subcontractor to actually do the work. The work was not done well. The court began to break apart. The school district sued the construction company, alleging negligence and breach of contract.

The construction company then filed a claim with its insurance company. However, the claim was denied, saying it had neither a duty to defend nor indemnify when the work was faulty. The insurance company indicated this was a clear contractual liability exclusion.

Initially, the lower court granted the insurance company’s claim for a summary judgment. This was later upheld by Fifth Circuit Court of Appeals in a 2-1 opinion. However, that ruling was later vacated and a question certified to the state supreme court. the question was this: Does a general contractor who enters into a contract agreeing to perform good work assume liability for damages arising out of any defective work, such as to trigger a contractual liability exclusion?

The Texas Supreme court answered no. An agreement to conduct the work in good faith doesn’t expand a company’s liability, the court ruled. The insurance firms still have to pay.

The Brown Law Firm, LLC, has offices in Belmont and Boston. For a free and confidential consultation, call 617-489-0817 or contact us online.

Additional Resources:
Ewing Constr. Co., Inc. v. Amerisure Ins. Co., January 2014, Texas Supreme Court
More Blog Entries:
Legislative Remedy to Gross v. FBL Financial Services Introduced, Nov. 26, 2014, Boston Small Business Lawyer Blog

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