Common Insurance Requirements in Business Contracts
Business contracts often include insurance requirements. Before signing a contract, lease, subcontract, or vendor agreement, business owners should understand what the insurance section requires.
Your insurance agent can help review whether your policies may satisfy the insurance requirements. A qualified attorney should review the contract language and explain your legal obligations before you sign.
Insurance requirements may affect your coverage, cost, timeline, and ability to start work. A client, landlord, general contractor, or vendor may ask for specific limits, additional insured status, a waiver of subrogation, primary and noncontributory wording, certificates of insurance, workers' compensation coverage, commercial auto coverage, umbrella limits, or other insurance terms.
Some requirements are simple. Others may require policy endorsements, carrier review, higher limits, or changes to your insurance program.
Certificates of insurance
A certificate of insurance, often called a COI, gives another party proof that certain insurance policies are in place. It may show coverage types, limits, policy dates, insurance carriers, the named insured, and the certificate holder.
A COI is often requested after a contract, lease, subcontract, or vendor agreement has already defined the insurance requirements. The certificate helps document coverage, but it does not replace the policy or confirm that every contract requirement has been met.
For example, listing another party as the certificate holder is not the same as adding that party as an additional insured. If the contract requires additional insured status, the policy or endorsement must support it.
Required limits
Many contracts require specific insurance limits. A common example is a contract that requires $1 million per occurrence and $2 million aggregate for general liability. Some contracts require higher umbrella or excess liability limits.
If your current limits are lower than the contract requires, you may need to increase coverage before the other party approves the agreement. Higher limits may affect premium, and carrier approval may not always be immediate.
Additional insured status
Some contracts require your business to provide additional insured status to a client, landlord, general contractor, or other party.
An additional insured is a person or organization given certain protection under another business's insurance policy. This is most often seen with commercial general liability insurance.
For example, a property owner may require a contractor to add the owner as an additional insured on the contractor's general liability policy. This can give the property owner certain protection if a claim arises from the contractor's work.
Being named as the certificate holder on a COI does not make that party an insured under the policy. The certificate holder is simply the person or organization receiving proof of insurance. If the contract requires additional insured status, that protection must come from the policy or endorsement.
Additional insured status frequently needs to be supported by a written contract or agreement. Almost all additional insured endorsements apply only when the policyholder is required by written contract or agreement to add the other party. If no written agreement is in place, listing that party on a certificate most often will not provide the protection they expect.
Coverage will depend on the policy, endorsement, type of claim, contract wording, and facts of the loss.
Waiver of subrogation
Subrogation is the process that may allow an insurance company to seek reimbursement from another responsible party after paying a claim. A waiver of subrogation limits or removes that right in certain situations.
This requirement is common in construction contracts, leases, vendor agreements, and service contracts. A landlord, client, or project owner may require your business and your insurance company to waive the right to pursue recovery from them after a covered loss.
A waiver of subrogation can affect rights under the policy. It may also require a specific endorsement. Availability, wording, and cost depend on the policy and carrier.
Primary and noncontributory wording
Some contracts require insurance to apply on a primary and noncontributory basis.
In plain terms, this generally means your policy is expected to respond first for certain claims, without seeking contribution from the other party's insurance, when the policy and endorsement support that arrangement.
This wording is often requested with additional insured status. It should be reviewed carefully because the requirement may not be included automatically.
Other coverage requirements
A contract may require workers' compensation coverage before employees, subcontractors, or business owners can enter a jobsite. This can create issues for sole proprietors, owner operated businesses, and subcontractors who assume the requirement does not apply to them.
Commercial auto requirements may apply when vehicles are used for business purposes, including owned vehicles, hired vehicles, non-owned vehicles, deliveries, jobsite travel, client visits, or employee driving. A personal auto policy may not satisfy a commercial contract requirement.
Some agreements also require umbrella or excess liability, professional liability, errors and omissions coverage, cyber liability, or other specialty policies. These requirements usually depend on the work being performed and the risks involved.
Contracts may also ask for advance notice if a policy is canceled, changed, or not renewed. This language is controlled by the policy and carrier rules, so it may not be available in the exact form requested.
Common problems with contract insurance requirements
Insurance requirements can create problems when they are reviewed too late. A missed requirement can delay a project, hold up a lease, slow down vendor approval, or add costs that were not included in the original agreement.
For example:
- A job may not start until the certificate and required endorsements are approved.
- A lease may be delayed if the landlord requires coverage, limits, or wording your policy does not currently provide.
- A client may require higher liability limits than your business currently carries. Higher limits need carrier approval, and approval is not always automatic.
- A general contractor may require additional insured status, a waiver of subrogation, or primary and noncontributory wording before allowing your business on site.
- A client, landlord, or general contractor may ask for certificate wording your policy does not support. This can delay approval while the request is reviewed.
These issues are easier to address before the contract is signed and before work begins. Once there is a deadline, active jobsite, pending lease start date, or client approval on the line, an insurance requirement can quickly become a business problem.
What to send your insurance agent before signing
When a contract includes insurance requirements, send the full insurance section to your agent before signing whenever possible.
Helpful information includes:
- The full insurance requirements section.
- Any sample certificate wording.
- Any additional insured requirements.
- Any waiver of subrogation requirements.
- Any primary and noncontributory requirements.
- Required limits for each coverage type.
- The type of work being performed.
- The contract, lease, project, or event location.
- The names and addresses of any parties requesting proof of insurance.
- The deadline for approval.
Complete information helps your agent determine whether the request can be met, whether changes are needed, and whether the requirement may affect cost or timing.
Talk with your attorney before signing
Your insurance agent can review the insurance requirements from an insurance standpoint. Your attorney should review the contract language, including indemnification, hold harmless provisions, limitation of liability clauses, and other legal obligations.
Insurance requirements are only one part of a contract. Legal questions about the contract itself should be directed to your attorney.
If your business is reviewing a contract, lease, subcontract, or vendor agreement with insurance requirements, Concklin Insurance Agency can help you understand what is being requested from an insurance standpoint and what steps may be needed.