Contractual Performance Exclusion

Purpose

Liability insurance covers the policyholder’s statutory liability towards third parties, not its own contractual performance obligations. AHB clause 1.2 makes this explicit by excluding claims for performance of contracts, supplementary performance, self-remedy, rescission, price reduction and damages in lieu of performance, even where such claims could in a given case be based on a statutory provision.

Effect and limits

Also excluded are losses arising in connection with supplementary performance, loss of use of the contractual object, wasted expenditure incurred in reliance on proper performance, financial loss due to delay in performance, and other remedies substituting for performance. The exclusion targets the entrepreneurial performance risk that rests with the policyholder itself, and separates it from the insurable consequential defect loss, where a defective work or product causes damage to other legal interests of the counterparty.

Negotiation and practice

The contractual performance exclusion cannot generally be bought back, as it reflects a fundamental principle distinguishing contract law from liability law. In practice, however, the boundary between excluded performance loss and covered consequential defect loss is frequently disputed, so businesses entering complex supply and works contracts should ensure careful scope-of-work drafting and consider complementary instruments such as performance bonds where appropriate.