Contracts are the backbone of any business, but if you’re not careful, they can create serious financial risks. Many business owners unknowingly sign agreements that conflict with their insurance policies, leaving them vulnerable to denied claims and unexpected liabilities.
In this post, we’ll break down:
✔ How contracts impact your insurance coverage
✔ Common contract clauses that can create risk
✔ Tips to align your contracts with your insurance
How Contracts Affect Your Insurance
Many insurance policies include contractual liability exclusions—meaning if you agree to assume liability in a contract, your insurer might not cover it.
Example: If you sign a contract agreeing to pay for any damages that occur, but your insurance policy excludes certain damages, you could be forced to cover the full cost out of pocket.
Contract Clauses That Could Void Your Coverage
1️⃣ Indemnification Clauses – Shifting Legal Responsibility onto You
What it is: An indemnification clause is a contract provision where one party agrees to compensate (or indemnify) another party for certain losses, damages, or legal liabilities.
How it affects insurance:
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Some indemnification clauses require you to assume liability for things that may not be covered by your insurance policy.
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Your General Liability (GL) policy may exclude claims that arise from an indemnification agreement if they extend beyond your standard liability coverage.
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If you agree to indemnify another company (e.g., a vendor or client), your insurer might deny the claim, leaving you responsible for the full cost.
Example:
You run a small contracting business and sign a contract with a large company to do repair work on their office. The contract includes an indemnification clause stating that you agree to take full responsibility for any accidents on the job site, even if the client was partly responsible. If an accident happens due to their negligence (faulty wiring, unsafe conditions), your insurance might not cover the claim because you agreed to indemnify them, meaning you’re now paying for everything out of pocket.
How to protect yourself:
✔ Review indemnification clauses carefully before signing
✔ Negotiate the clause to ensure it aligns with your insurance coverage
✔ Ask your insurer whether your policy covers indemnification
2️⃣ Hold Harmless Agreements – Requiring You to Cover Damages You Didn’t Cause
What it is: A hold harmless clause is a contract provision where one party agrees not to hold the other responsible for certain damages, losses, or liabilities. Essentially, it protects one party from lawsuits or claims, transferring the risk to the other party.
How it affects insurance:
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If you agree to a hold harmless clause, your insurance may not cover damages because you’ve contractually agreed to take responsibility for something that normally wouldn’t be your fault.
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Many General Liability (GL) and Professional Liability (E&O) policies have exclusions for contractual liability unless it falls under “insured contracts” (which vary by policy).
Example:
You own a janitorial company and sign a contract to clean an office building. The contract includes a hold harmless agreement stating that you take full responsibility for any damage in the building during your service, even if it wasn’t your fault. If a pipe bursts overnight due to faulty plumbing, the building owner could claim you are responsible per the contract—even though the damage wasn’t caused by your work.
If your insurance sees that your contract made you responsible for damages beyond normal liability, they might deny the claim—leaving you to cover the repair costs.
How to protect yourself:
✔ Avoid overly broad hold harmless clauses
✔ Limit liability to only damages directly caused by your business
✔ Consult your insurer before signing agreements that extend liability
3️⃣ Waivers of Subrogation – Preventing Your Insurance from Recovering Costs
What it is: A waiver of subrogation is a clause that prevents your insurance company from recovering costs from a third party that was at fault for a loss.
How it affects insurance:
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Normally, if your business suffers a loss due to someone else’s negligence, your insurance company can seek reimbursement (subrogation) from the responsible party or their insurer.
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If you’ve signed a waiver of subrogation, your insurer loses this right—meaning they can’t recover costs, and you may end up paying higher premiums or losing coverage altogether.
Example:
You own a landscaping company and lease a truck. The rental contract includes a waiver of subrogation, meaning if the rental company’s poor maintenance causes an accident, your insurer can’t sue them to recover repair costs. Instead, your insurance must pay the full amount—and they might pass that cost onto you through higher premiums or denied coverage.
For more details, check out this National Association of Insurance Commissioners (NAIC) Guide on contractual risks.
How to Protect Yourself
✔ Always review contracts with your insurance agent
✔ Negotiate terms that align with your coverage
✔ Ask for legal advice before signing major agreements
If you’re not sure whether your contracts and insurance policies work together, let’s chat! Schedule a call with me today