If you are running a business that works on a contractual basis with other businesses, you should consider getting contractual liability insurance. As we already mentioned, contractual liability can be a bit tricky for the first-timers to wrap their heads around. So, here is an example to make it easier for you to understand.
Mrs. Megha started her art classes on a rented property that belonged to Mr. Akshay. They signed a contract where Mr. Akshay put a clause requiring Mrs. Megha to indemnify Mr. Akshay if her business causes any sort of damage to a third party person, which may lead to lawsuits or compensation.
Now, one fine morning, a parent comes to drop her son at Megha’s art class and trips on a broken floor and injures her arm. The parent demands compensation from both Mr. Akshay and Mrs. Megha for they knew about the broken step and did not bother to fix it. Mr. Akshay and Mrs. Megha both come to an agreement with the victim and pay their equal shares to compensate for the damage.
After this incident, Mr. Akshay invokes the indemnity clause in the contract, and Mrs. Megha compensates Mr. Akshay for his share of the payment for the third-party damage. Mrs. Megha also had contractual liability insurance that reimburses her for making all the compensatory payments.