The Contractual Liability Exclusion in Professional Liability (E&O), Explained

For service providers reviewing a contract: this exclusion in Professional Liability usually removes coverage for promises you make only by contract, like guarantees and broad indemnities.

What does the contractual liability exclusion mean?

An exclusion is policy wording that removes coverage for certain claims. Here is a typical version of this one:

• Liability assumed: a duty you take on only because of the contract. Without the contract, the law usually would not put that duty on you.
• The "liable anyway" exception: if the claim is really about careless work, the policy may still respond.
• Guarantees and warranties: promises of a specific result or of the quality of your work, such as a savings figure or a go-live date. A claim that you promised and did not deliver is often excluded.
• Indemnity: a promise to pay for, and sometimes defend, the client's losses (also called a hold harmless clause).

Which contracts can trigger the contractual liability exclusion?

The exclusion matters most when a contract asks for more than careful work:

• Master service agreements (the main contract that sets the terms for ongoing work) and statements of work (the document that lists the specific job) from large clients (see MSA insurance requirements)
• Indemnity clauses that cover "any and all" losses, whatever the cause
• Service level agreements (promises of response times or uptime, with credits if you miss them)
• Fixed-fee projects that promise a specific outcome or deadline
• Performance or savings guarantees in consulting and technology work

If you provide software or technology services, you may usually buy a Technology E&O form instead of a standard Professional Liability form (see Technology E&O vs. Miscellaneous E&O). Its contract wording may differ, and it still varies by policy, so read the exact wording.

How does the contractual liability exclusion play out in a claim?

Here is a hypothetical example. A marketing consultant signs a contract that promises more leads. The consultant also agrees to indemnify the client for "all losses arising from the services." Leads stay flat. The client sues and asks for its fees back.

Part of the suit says the consultant ran the campaign carelessly. That is a negligence claim, and a Professional Liability policy may respond to it, subject to its terms. Another part says only that the promised number was not reached. That part may be excluded. The demand for fees back is often excluded too, because policies usually do not pay to return fees you earned.

When a suit mixes covered and excluded parts, some policies still pay to defend the whole suit, at least until the covered parts are resolved. Others split the defense costs instead.

General Liability (the policy for bodily injury and property damage) usually will not fill this gap. It rarely covers financial loss from your services. See Professional Liability vs. General Liability.

What will underwriters ask for?

Underwriters are the people who price and approve the policy. They often ask for:

• Your standard client agreement
• Whether you offer guarantees, warranties or service credits, and the indemnity terms in your largest contracts
• Loss runs, which are reports showing your past claims
• Your current policy, including its retroactive date (the earliest work date the policy covers)

What affects the cost?

• Your services and revenue
• How much contract risk you take on, such as broad indemnities, guarantees and service credits
• Your claims history
• The limit you need and your retention, the amount you pay on a claim before the policy pays
• The policy form, since broader contract wording may cost more

Frequently asked questions

Does Professional Liability cover my promise to indemnify a client?

Often only in part. The policy may respond to the share of the client's loss caused by your negligence. A promise to cover losses you did not cause is often outside coverage. Your attorney can explain what the indemnity clause asks of you.

Will my policy respond if I miss a deadline in the contract?

Maybe, depending on why. If a mistake in your work caused the delay and a loss, the policy may respond. If the claim is only that a promised date passed, it is often excluded. Professional Liability is almost always claims-made, so the claim must be made and reported during the policy period or any reporting window the policy allows.

Can I add my client to my policy to cover the indemnity?

Usually not. Clients usually cannot be added as an additional insured (a second party named on your policy for protection) on Professional Liability, and the few forms that allow it come with their own conditions. Check exactly what your contract asks for, then send it to Morrow so we can review it against your policy.

Can I find a policy without this exclusion?

Almost every policy has some version of it, but the wording varies. Some forms have a clear "liable anyway" exception. If you already have a policy, Morrow can request new quotes so you can review each form's exclusion wording with your attorney, keeping your retroactive date and prior acts coverage (coverage for earlier work done before the policy started) where the market allows.

This article is general information, not legal advice or a coverage determination. Coverage depends on the actual policy wording, carrier underwriting and your contract terms.