How to Assess Common Insurance Requirements in Contracts

KEY TAKEAWAYS:

• Insurance requirements will differ based on the contract type and scope of work.
• Consider what insurance policies and endorsements may be needed and why.
• Have your legal team work with an insurance expert to craft insurance requirements.

BONUS: This article contains a free Contract Review Cover Sheet from the author that you can download!

Insurance requirements are present in most commercial contracts and construction agreements. But few contracts professionals have a solid understanding of how to assess insurance requirements and clauses. This article provides tips on how to craft best-in-class insurance requirements used to transfer contractual risk to downstream parties in contracts and reduce your company’s contractual risk.

Getting Started

Before you start drafting the insurance clause, gather information needed. This includes information on who the parties to the contract are, the vendor’s scope of work, potential risk of loss exposures, project term and location, estimated project value, the client’s contractual risk transfer preferences, and the client’s preferred length of insurance requirements (if any).

Contract Review Cover Sheet – FREE DOWNLOAD

One tool that I developed to help streamline and simplify the information gathering process is this Contract Review Cover Sheet that you can download for free.

Typically, someone from the company’s business development team who requests a contract review will take two or three minutes to complete this one-page questionnaire and then they will send the form with the contract for review to the company’s legal department. Legal can also submit the completed form to the company’s insurance agent or broker when requesting a review of the insurance provisions in the contract.

The form includes basic information about the project needed for the review, which helps avoid time-consuming back and forth questions. It also includes check boxes to note any potential risk of exposure to things such as pollutants, cyber-related losses, floods, earthquakes, hurricanes, wildfire, work in, over, or near water, work at heights or underground, or any potential use of aircraft, drones, watercraft, and cranes.

Create Separate Insurance Requirement Templates

I recommend creating separate insurance requirement templates for each of your main contract types, because the insurance requirements will vary depending upon the type of products or services provided. By creating separate insurance requirement templates, you can tailor the insurance requirements to the type of work to be done and the potential risk of loss.

Plus, tailoring the requirements helps to keep them as short as possible, and it saves time when making changes to the requirements for specific contract needs.  For example, insurance requirements for construction contracts are typically among the longest due to the wide variety of insurance coverages that may be needed to address various risk exposures associated with construction work. On the other hand, insurance requirements for service agreements tend to be much shorter because there are fewer insurance coverages that may be needed.

Common Insurance Requirements

Consider what insurance may be needed to address the potential risk of loss exposures while keeping in mind the vendor’s scope of work and the project value size. In the context of a client to vendor service agreements, here are some of the most common types of insurance requirements.

Commercial General Liability Coverage

Every contract should include a requirement for Commercial General Liability insurance because this policy can provide liability coverage for bodily injury, property damage, and personal and advertising injury to third parties caused by the vendor’s products and operations. Most contracts require policy limits of $1M or $2M per occurrence and aggregate limits of $2M or $4M. An aggregate is a limit in an insurance policy stating the most it will pay for all covered losses sustained during the policy term.

Commercial Automobile Liability Coverage

Contracts should also require Commercial Automobile Liability if there may be any use of vehicles in the scope of work. For example, if the client is hiring an independent contractor who will be working remotely and a car should not be needed to perform the services for the client, then this type of coverage is not needed. Most contracts require policy limits of $1M per accident.

Worker’s Compensation and Employer’s Liability

Contracts should require Workers’ Compensation and Employer’s Liability if any of the vendor’s employees may be performing work outside of the vendor’s own location (e.g., working remotely). This insurance is needed to cover the vendor’s liability as an employer for any work-related bodily injury or disease to its employees. Workers’ Compensation limits are statutory. Most contracts require policy limits of $1M.

Umbrella/Excess Liability Coverage

Contracts should require Umbrella/Excess Liability to provide higher limits over Commercial General Liability, Commercial Automobile Liability, and Employer’s Liability policies required in contracts.  This insurance is designed to provide protection against catastrophic losses. It can also pay claims in the event the underlying policies’ limits have been exhausted. Most contracts require policy limits ranging from $1M to $10M depending on the scope of work, project size, and risk of loss.

Other Types of Coverage

Other commonly required policies may include Contractor’s Pollution Liability (for pollution exposures at job sites), Professional Liability (for professional products or services), Property or Inland Marine insurance (covering vendor’s property and property of others while in the vendor’s care, custody, or control), and Cyber Liability (for cyber-related exposures).

Some other types of insurance that may be required in different types of contracts but are not so common include:

• Aircraft Liability, Aircraft Hull, or UAS/Drone Liability (for aircraft or drone usage)
• Protection and Indemnity, Hull insurance, Vessel Pollution Liability, and Marine General Liability (for watercraft usage)
• Transit / Ocean Marine insurance (covering property in transit)
• Rigger’s Liability (for rigging services)
• Technology Errors & Omissions (for tech-related products or services)
• Warehouse Legal Liability (insuring company’s property stored by vendor)
• Crime insurance (for  vendors working onsite at company or customer locations).

What About Endorsements?

In addition to policy types, consider what endorsements may be needed. An endorsement is an insurance policy form that is used to make a change to a policy.

The five most commonly required endorsements include the following listed below.

Of these, additional insured and contractual liability are some of the most important to require, because these can help to support a vendor’s indemnity obligations and pay claims on behalf of your company.

You should also understand why each requirement is important and how insurance works. This information is useful during contract negotiations to understand which insurance requirements are the most important versus nice to have.

Additional Insured

This endorsement adds a person or organization not automatically included as an insured under an insurance policy (i.e. your company) as an insured under the policy at the request of the named insured (i.e. the vendor). This coverage is important as it can help to protect your company from liability arising out of the vendor’s activities.

Primary and Non-contributory

Having this coverage means that when the vendor adds your company as an additional insured on their liability policies, the vendor’s insurance will pay first (i.e. be primary). And your company’s liability insurance will not be required to pay (i.e. your insurance will be non-contributory). This helps to preserve your company’s insurance limits by having the vendor’s insurance pay for some claims.

Waiver of Subrogation

This is an acknowledgment by an insurer that it has no right to subrogate against a liable third party (i.e. your company) after it has paid a loss on behalf of its insured (i.e. the vendor). For example, let’s assume your company was partly at fault for causing bodily injury to one of the vendor’s employees. If waiver of subrogation was required by contract with the vendor and granted under the vendor’s Workers’ Compensation policy, then the Workers’ Compensation insurer could not subrogate against your company to recoup its losses for claim payments the insurer made to the injured employee.

Contractual Liability

This coverage can help support the vendor’s indemnity obligations by providing some coverage for liability imposed on an entity by the terms of a contract.

Notice of Cancellation/Non-renewal

This endorsement can provide notice of cancellation and/or non-renewal to third parties. However, most insurers will only endeavor to provide such notice, and failure to provide notice will not stop policy cancellation or non-renewal.

Drafting and Updating Insurance Requirement Templates

As a best practice, insurance requirement templates should be updated every three to five years to ensure requirements remain up-to-date. Contract Risk Academy can collaborate with your legal team to provide best-in-class insurance requirement templates based on your contracting needs.

Remember to download your free Contract Review Cover Sheet!