If your company uses vendors, you’re likely already familiar with vendor contracts. General provisions in the contracts, such as timing and delivery requirements, are well known, but did you know that inadequate insurance requirements in vendor contracts could put your company at risk? Learn the important, but frequently missed, insurance provisions that should be in all vendor contracts.
Your vendor contracts should clearly state the types of insurance your vendors must obtain before doing work with your company, including the minimum limits of liability that you expect the vendors to carry. Common types of insurance required of vendors are Commercial General Liability (CGL) insurance, Cyber Risk insurance, Professional Liability/Errors and Omissions (E&O) insurance, Automobile Liability insurance and Workers’ Compensation insurance.
CGL insurance. This will provide coverage for the vendor in the event that an accident involves its premises, operations and/or products. Be sure to require that the vendor’s CGL policy does not restrict coverage based on contractual liability; if it does and your company is not named as an additional insured (see below), you may be without coverage despite your contractual agreement with the vendor. CGL policies frequently provide insurers with rights of subrogation. In the event, however, that your vendor harms a person or property while delivering your products, it is possible that the vendor’s insurer could attempt to sue your company to recover amounts paid on the claim! Requiring a waiver of subrogation from your vendor’s insurer will prevent your company from becoming entangled in unanticipated litigation.
Cyber Risk insurance. If your vendor will be using, storing or accessing any private, confidential or protected information, be sure to require that it maintain Cyber Risk insurance. Cyber Risk insurance will ensure that your vendor is covered in the event of a data breach, which is essential. Click here for more information about cyber insurance.
Professional Liability/E&O insurance. Depending on the types of vendor services your company employs, you may want to require the vendor to maintain Professional Liability or E&O coverage. This coverage protects the vendor from errors in the performance of professional duties, such as software design, development and implementation. Think carefully if your vendor’s negligence in providing services could result in financial losses for your company. If it could, you may want to require that the vendor purchase E&O insurance.
Automobile Liability and Workers’ Compensation insurance. While often thought of as secondary, Automobile Liability and Workers’ Compensation insurance coverages are essential. They aim to protect your company by ensuring that the vendor is adequately insured in the event any accidents occur when goods or services are being delivered to you.
Additional Insured insurance. When working with vendors, you should not only double-check that the vendor has maintained sufficient levels and types of insurance, but also consider being included as an Additional Insured on the vendor’s policies. Additional insured provisions take many forms, and you should speak with your insurance broker or coverage counsel before deciding which is best for your company. In theory, being included as an additional insured provides protection as if your company was a named insured on the vendor’s policy. However, some additional insured endorsements limit coverage to certain loss amounts or to certain activities and products. You should remember to review the additional insured provision in advance to make sure that you are getting the broadest protection and to prevent surprises later in the event of a claim.
It is not unusual for some vendor contracts to require the purchaser of services or goods (that is, you) to add the vendor as an additional insured to the purchaser’s policy. If your contract requires such an addition, be sure that you work with your insurer to properly add the additional insured vendor as required by the terms of the vendor contract.
Certificate of insurance. Perhaps the most important aspect of insurance coverage in vendor contracts involves the requirement that the vendor provide you with a certificate of insurance. A certificate of insurance should evidence that the vendor in fact has obtained all of the insurance required in the vendor contract. Many contracts contain the requirement of furnishing a certificate of insurance, but all too often companies do not actually follow up to receive the certificate until a problem occurs. Designate an individual in your company familiar with insurance to be responsible for receiving the certificates of insurance and reviewing them to ensure that all of your company’s requirements are actually met.
Note, however, that a certificate of insurance is not itself insurance. If there is a claim against you, there is no guarantee that you are protected by the vendor’s insurance, even if you have a certificate of insurance. In your vendor agreements, you should require the vendor to provide, at the very least, 60 days’ notice before the vendor can cancel its insurance. You can also reserve for yourself the right to request and review the insurance policies the vendor is required to maintain. And at the very least, you should request that additional insured endorsements accompany any certificate of insurance the vendor is required to provide.
Taking proactive steps to ensure that the insurance requirements in your vendor contracts accurately reflect the needs of your company is vital to avoiding complicated insurance issues when claims arise. If you are unsure what types of risks might be applicable to your company’s various vendor contracts, be sure to work with a professional who can adequately identify potential liability issues and ensure your company is protected.
This update was republished on September 12, 2017 by Law360, “Insurance Considerations For Drafting Vendor Contracts“.