Law360, New York (September 12, 2017, 2:14 PM EDT) —
|Catherine Del Prete|
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? Indemnification provisions serve as important and necessary protection, but the insurance provisions can mean the difference between actual and no defense against future liability or claims. Common vendor contracts only require a vendor to maintain general liability insurance during the course of performance under the agreement. This language presents a multitude of issues that often arise when a claim occurs and you seek coverage from your vendor. Taking proactive steps to ensure that your vendor contract contain adequate insurance provisions is vital to ensure that your company is properly protected if and when a claim occurs.
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. In the event that a vendor does not have adequate limits in its primary policy, vendors can satisfy the coverage limit requirements by purchasing umbrella or excess insurance. Common types of insurance required of vendors are commercial general liability (CGL) insurance, cyberrisk insurance, professional liability / errors and omissions (E&O) insurance, business 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. Note also that being included as an additional insured helps to reduce any risks as an insurer is not generally permitted to exercise subrogation rights against its own insured.
Cyberrisk Insurance. If your vendor will be using, storing or accessing any private, confidential or protected information, be sure to require that it maintain cyberrisk insurance. Cyberrisk insurance will ensure that your vendor is covered in the event of a data breach, which is essential. If your vendors will have the care, custody or control of your owned property (such as equipment), you should also require that the vendors possess property insurance coverage.
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. Similarly, if vendors have access to your company’s money or securities, crime insurance should be required. Crime insurance will provide coverage in the event that an employee of the vendor steals or misappropriates funds from your company. Depending on your business, you may also want to require the vendor to maintain media coverage, which offers more protection for liabilities relating to advertising and publishing activities that the more limited advertising liability provisions in a typical CGL policy.
Business Automobile Liability and Workers’ Compensation Insurance. While often thought of as secondary, business automobile liability and workers’ compensation insurance coverages are essential. Both of these coverages 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 on your property. While both coverages are typically mandated by state law, your company should insist that its contracts contain minimum limits and that your vendors provide you with proof of adequate coverage. Alternatively, your vendor should provide you with proof that they qualify for an exemption from the statutory requirement of having workers’ compensation coverage.
Umbrella or Excess Insurance. Umbrella or excess insurance provides coverage that sits above primary coverage. While excess coverage sits above only one line of coverage, umbrella policies can sit above multiple different types of coverage. These types of coverage are often less expensive to purchase than primary coverage, and provide vendors with an alternative method of satisfying the minimum limits required of your vendor contracts. If your vendor pairs umbrella or excess coverage with its primary coverage, be sure to review their policy to confirm that no gaps in coverage exist. While excess and umbrella coverage often follows form to the underlying coverage, some policies contain “non-follow form” endorsements that carve back coverage. In addition, some policies contain different definitions or conditions that provide less coverage than the underlying. If you permit your vendors to satisfy the policy limits by purchasing umbrella or excess coverage, be sure to require that the coverage follows form to the underlying under the same terms and conditions.
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. If possible, request to review the vendor’s proposed additional insured provisions in advance to make sure they comply with the requirements in the vendor contract.
In addition, there is a wide variation between additional insured provisions that insurers are willing to place. For example, some additional insured provisions provide that the additional insured coverage is “primary,” which means that the vendor’s insurer will pay first on the claim. Having this language will preemptively avoid disputes between your primary carrier and your vendor’s carrier vis a vis other insurance clauses. Carefully consider whether there is a potential for liability after the performance on the contract is completed. If so, then any additional insured coverage should specify that it is for both ongoing and completed operations, as many coverages can be limited to ongoing operations. Finally, the vast majority of insurance policies contain exclusions for “insured vs. insured” claims, meaning that claims by one named insured against another are barred by the policy. Be sure to review the additional insured coverage and this exclusion to ensure that coverage is not barred for claims by your company against the vendor. Including these specific additional insured requirements in the form of your contract is vital to protect the bargained-for coverage under your vendor contract. However, you should be sure to request copies of the additional insured coverage to ensure that all requirements are met.
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.
John S. Rossiter is a partner with Perkins Coie LLP in San Francisco, and Catherine Del Prete is an associate at the firm’s Los Angeles office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.