Why contractual liability is the "silent killer" of brokerage firms

As insurance professionals navigate an increasingly litigious business environment, one risk remains both pervasive and often overlooked: contractual liability.

With nuclear verdicts on the rise and social inflation increasing litigation exposure, brokers who don’t perform due diligence on contract language do so at their peril, one expert told Insurance Business.

Contractual liability arises when one party agrees to take on certain risks, often unknowingly, through indemnity or hold harmless clauses. These provisions, commonly worded to provide indemnity “to the fullest extent permitted by law,” may sound standard but carry significant risk.

Jeff Lang (pictured), president of retail property and casualty at Venbrook, calls contractual liability the "silent killer" of brokerage businesses.

“Contractual liability isn’t a sexy topic,” he said. “But businesses are all operating under contracts. If they’re not done the right way, and you don’t have the right backing and protection, it could kill the business.”

Common pitfalls that brokers make when executing contracts

Lang, who has over three decades’ worth of experience in insurance with a focus on the brokering side, said brokers frequently find themselves in hot water when trying to interpret or apply contract language without legal training.

One of the most dangerous scenarios, he said, arises when there’s a lack of risk transfer alignment. Lang explained that many contracts include indemnity clauses that aren’t supported by the client’s insurance policies.

“When we see ‘to the fullest extent permitted by law,’ we have to go back to the contract and say: What exactly does this cover?” he said. “We want to make sure that definition is broad enough, and there are language and endorsements that we can amend to standard general liability (GL) policies to fix the language, to make it broader, to cover any additional insurers, or to address the anti-indemnity statutes.”

For example, a subcontractor may agree to indemnify a general contractor, but if a claim arises from the GC’s sole negligence, the subcontractor’s general liability (GL) policy may not respond. “That claim could be denied outright, because it's not considered an insured contract under the policy,” Lang said.

Similarly, when contracts require additional insured status or waivers of subrogation, failure to secure proper endorsements can leave clients entirely exposed.

“I’ve seen countless examples where the contract calls for a waiver of subrogation, but it wasn’t included in the policy,” Lang said. “You’ve now potentially nullified your coverage and exposed your client to an uninsured loss.”

Environmental and punitive damages are other high-risk areas. Contracts that include sweeping indemnities for pollution liability or gross negligence may run up against exclusions or legal restrictions in standard GL policies.

“In some states, punitive damages aren’t insurable,” Lang said. “If your client signs a contract agreeing to cover those, they’re on their own.”

Another common trap? Over-reliance on boilerplate contracts, especially across jurisdictions. What works in New York may violate labor laws in New Jersey, Delaware, or New Hampshire. Lang emphasized the importance of customizing contracts and insurance programs for each state’s legal framework.

“It’s critical to identify where your client operates and tailor endorsements accordingly,” he said. “A one-size-fits-all contract doesn’t work in a 50-state regulatory system.”

Avoiding contractual liability risks: Best practices for brokers

To avoid these contractual landmines, Lang recommended a proactive, team-based approach:

• Involve legal and risk management early: “We need a seat at the table before contracts are signed,” Lang said. “Bring in legal counsel and risk managers upfront to flag red flags and structure appropriate coverage.”
• Negotiate balanced indemnity language: Avoid one-sided clauses that transfer unreasonable risk to your client. Contracts should reflect a fair allocation of liability.
• Align insurance with contract terms: Verify that all contract requirements, such as additional insured status, waivers, and indemnity provisions, match what’s covered in the insurance policy.
• Use checklists based on industry and jurisdiction: Develop industry-specific contract review protocols to avoid missing critical requirements.
• Educate sales and ops teams: “Often it’s sales or operations staff signing contracts without fully understanding the exposure,” Lang said.

Lang considers broker education essential to avoid litigation. He encouraged ongoing education across brokerage teams to flag problematic language in contracts.

“Ask carriers for claim examples, study how these exposures play out,” he said. “Understand the nuances of the states you’re working in. The information is out there you just need to be curious.”

Ultimately, Lang believes brokers need to take a more strategic role in client advocacy.

“We’re not just selling insurance,” he said. “It’s our job to educate them on contractual liability and the insurance implications. It's our job to anticipate contractual requirements and negotiate the coverage properly.”