Assumed liability refers to the obligation of one party to take on the responsibility for the liabilities of another party.
This can arise from contractual agreements, statutes, or common law.
This concept is prevalent in various business arrangements, such as mergers, acquisitions, contracts for services, and lease agreements.
By agreeing to assume liability, one party can help protect the other from certain risks that might otherwise jeopardize their financial stability.
For example, in service contracts, a contractor may agree to assume liability for any damage or injury that occurs on the job site.
Understanding assumed liability is crucial for businesses because it can significantly impact their risk management and insurance needs.
When one party assumes another’s liability, it often necessitates the purchase of additional insurance coverage to protect against unforeseen claims.
This can include general liability, professional liability, or specific endorsements that reflect the unique risks being accepted.
In practice, businesses need to carefully evaluate any contract involving assumed liability to ensure they are equipped to meet these obligations without exposing themselves to excessive risk.
Having professional legal advice during contract negotiations can help identify potential liabilities and appropriate risk management strategies.
Examples of assumed Liability
Construction Company
A construction company is contracted to renovate a building. In the contract, the construction company assumes liability for any accidents that occur on-site, meaning it will bear the costs if an employee is injured during the project.
Software Firm
A software firm enters a partnership with an IT service provider. The contract states that the software firm will assume liability for any data breaches that occur while using the IT provider’s systems, transferring the associated risk.
Pros and Cons of Assumed Liability
In the context of business insurance, assumed liability presents both advantages and disadvantages.
One significant benefit is that it can provide a layer of protection for the business entity against financial repercussions from lawsuits or claims, though it does not automatically shield owners or executives from personal liability.
This insurance mechanism can also ensure asset protection, preventing the seizure of company assets during legal disputes and allowing for continued operational stability.
In addition, assumed liability coverage can provide coverage against various risks, encompassing lawsuits, property damage, and employee-related claims, creating a more robust safety net for businesses.
It is essential to note that assumed liability is not a catch-all solution; it does not replace personal liability coverage for owners or executives, potentially leaving them exposed in certain situations.
Incorporating this type of coverage will naturally lead to some increase in insurance costs, particularly for businesses operating in high-risk sectors.
Unfortunately, the claims process can also be fraught with complexity, especially when distinguishing between personal and business liabilities, which may lead to extended legal battles and uncertainty.
Did you know?
A little-known aspect of Assumed Liability insurance coverage is that it does not automatically cover all contractual liabilities.
Many businesses assume that “assumed liability” means any liability they agree to in a contract is covered under their general liability policy.
However, standard Commercial General Liability policies only cover two types of assumed liabilities:
- Liability that would exist even without a contract (e.g., negligence).
- Liability assumed under an “insured contract.”
An “insured contract” typically includes leases, sidetrack agreements, certain maintenance agreements, easements, and certain other business agreements.
However, contracts such as indemnification agreements that significantly broaden liability beyond normal business risks may not be covered, unless specifically endorsed.
This means that businesses signing contracts with hold-harmless or indemnity clauses could be taking on more risk than their insurance will cover, leaving them exposed to costly claims they thought were insured.
Category: Liability Coverage
References and further reading about Assumed Liability: