Although often considered an afterthought, insurance requirement provisions are one of the most critical topics to be addressed in a commercial contract. A well-drafted insurance requirement provision can help a party decrease the risk associated with a particular project, or shift the consequences of that risk to another party. Moreover, even the most stringently worded warranty, recall, or indemnification provision is only as good as the insurance coverage insuring such risks.
When drafting insurance requirement provisions, it is important your company, legal counsel, and insurance broker first identify the risks associated with the transaction, as well as the insurance products available to cover those risks. For example, in addition to the more “common” types of insurance coverage (commercial general liability, property insurance, workers’ compensation insurance, and automobile liability insurance) there are a variety of specialized insurance coverages that may be applicable to your particular transaction. These include:
- Fidelity bond/crime liability (covering theft, embezzlement, and other willful acts),
- Errors & omissions liability coverage (covering professional services),
- Employment practices liability (covering wrongful termination, discrimination, and wage and hour claims), and
- Cyber risk liability (covering database and server security breaches).
When drafting the insurance requirements provision for your commercial contract, you should include, at a minimum, the following information:
- What type of insurance coverage(s) will be required,
- Which parties will be covered, and
- What the policy limits are for each policy (i.e., how much coverage).
We also recommend that the insurance requirements provision specify minimum insurance carrier rating requirements, an obligation for the parties to exchange insurance certificates or other proof of insurance, and a requirement that the required insurance policies not be modified or cancelled without prior written notice to the insured parties. It may also be appropriate to include a waiver of subrogation rights as to the parties and their respective insurers.
Finally, it is important to remember that risks over the life of a transaction are not static and are subject to change, both in the nature and scope of the risks. As a result, if your commercial contract is a long-term contract, we recommend including the ability to review and make reasonable amendments to insurance requirements provision over the life of the contract.
For more information about insurance provisions in commercial contracts or for other commercial contract questions, please contact attorney Steve Theising at stheising@KDDK.com or (812) 423-3183, or contact any member of the KDDK Business Law Team.
About the Author
Steven M. Theising, an attorney at Kahn, Dees, Donovan & Kahn, LLP (KDDK), in Evansville, Indiana, practices primarily in the areas of business, real estate, tax and employee benefits, construction, and healthcare law. Steve utilizes his accounting and financial background to provide both legal and practical business analysis in negotiating, resolving and closing business, construction and real estate transactions and disputes. He also assists clients with addressing and resolving estate planning issues.