In this multi-part series, we highlight key contract issues for today’s business owners, including:
Insurance Provisions in Commercial Contracts
In this article, we provide overall tips for insurance provisions. As a business owner, you have likely noted that most commercial contracts demand certain types and levels of insurance coverage. Depending on the nature of the transaction, these provisions may be extensive, covering a wide range of contingencies for any given deal, or they may be simple and straightforward.
In either instance, it pays to be vigilant in reviewing the insurance provisions in your contracts. Failure to do so may result in agreement to provide unexpected or unwanted insurance coverages. This advice applies to the party requesting certain insurance coverages from a business partner as well, and it is equally important to secure the insurance protection that you need if asking for coverage.
Choose an Appropriate Insurance Provision
When negotiating an insurance provision in your contract, first consider whether the insurance coverage is appropriate to the underlying deal. More specifically, ensure that both the level and type of insurance are tailored to the specific transaction. As is the case with other contract provisions, accurate and appropriate insurance provisions are critical: insufficient or unfavorable insurance provisions can lead to unwanted – and potentially disastrous – consequences.
Level of Coverage
Some deals will require a high level of insurance coverage, while others will not. A typical provision requesting a usual or moderate level of coverage may be all that is needed for your deal, given the risks at hand. However, in other circumstances (dependent on the particular product or service underlying the contract), you may face a request for a substantial level of insurance coverage.
In either case, be sure that you review the language, are aware of the limits requested, and verify that your insurance portfolio includes the coverages requested.
Type of Coverage
It is advisable to attempt negotiation only for the insurance coverages that are necessary and pertinent for your deal.
For example, if you contract with a company to provide services on-site, it may be appropriate for that company to request proof of workers’ compensation coverage for your employees. It may not, however, be appropriate to include insurance provisions pertaining to computer security or environmental damage liability. Agreeing to insurance provisions that do not make sense to the deal at hand can lead to inflated costs, watering down of insurance, and surprises later on should you fail to fulfill your obligations under those provisions.
Keep in mind: if the deal calls for coverage you do not have (due to either the level of or type of insurance demanded), you may secure a “rider” with your insurance provider in order to obtain the coverage needed for the particular order or project. Riders are customized add-on provisions within an insurance policy, crafted to meet the needs of the policyholder.
Don’t Create Extra Liability
In addition to ensuring insurance provisions appropriate for the deal, it is critical to avoid agreeing to an insurance provision calling for coverage beyond what you have in your portfolio. If not, you will inadvertently create a contract liability for yourself for the shortfall in coverage.
You can avoid this unwanted result by verifying that the insurance coverage provided in the contract does not exceed the amount of insurance you currently have in place.
For example, if a contact demands that your company have general commercial liability coverage in the amount of $5 million, but your company has only $3 million in coverage, agreeing to provide coverage at the $5 million level will likely create a $2 million contract obligation.
Take the time to review your insurance contract provisions to ensure that they align not only with the underlying deal, but with the level and types of insurance currently in place.
Be equally wary of both standard form insurance provisions that do not meet the needs of the parties and of extensive provisions that call for unnecessarily high or inapplicable coverage. Either of these scenarios may cause complications moving forward. To best avoid these pitfalls and to craft an insurance policy that fits your needs, it is advisable to seek the assistance of an attorney with experience in negotiating commercial contracts.
Pittsburgh Corporate Attorneys
Dan Lynch is the Founder and Managing Partner of The Lynch Law Group. With questions about business contracts, insurance provisions, or other legal matters, contact him at 724-776-8000 or via email at email@example.com.