If you are a business owner, you might have heard the term “insurance clause” being thrown around. It is a crucial aspect of any commercial contract, yet it is often overlooked or understated. In this journal article, we will delve into what an insurance clause is, its types, and how to negotiate and draft one that best protects your interests.
What is an Insurance Clause?
An insurance clause is a provision in a contract that outlines the insurance requirements and obligations of the parties involved in the contract. It determines who will bear the risk of loss or damage to the property, goods, or services in case of unforeseen events such as theft, fire, natural disasters, or accidents. The insurance clause also specifies the type and amount of insurance coverage the parties must carry, as well as any additional insureds or loss payees.
The insurance clause serves two main purposes. Firstly, it ensures that all parties are protected against damages or losses that may occur during the contract’s performance. Secondly, it assigns responsibility for any claims or lawsuits that arise from such damages or losses. Without an insurance clause, the parties may end up in costly legal battles that could have been avoided.
Types of Insurance Clauses
There are several types of insurance clauses that you may encounter in a commercial contract. They include:
Type of Insurance Clause |
Description |
|---|---|
Blanket Insurance Clause |
Requires the parties to carry a specific type and amount of insurance coverage throughout the contract’s term. |
Named-Peril Insurance Clause |
Requires the parties to carry insurance coverage against specific risks or perils mentioned in the contract. |
Primary Insurance Clause |
Requires one party to carry primary insurance, which will be the first to respond to any claims or lawsuits. |
Excess Insurance Clause |
Requires one party to carry excess insurance, which will only kick in after the primary insurance has been exhausted. |
Negotiating an Insurance Clause
When negotiating an insurance clause, it is essential to consider how the clause will affect your business’s financial and operational aspects. Here are some factors to keep in mind:
Scope of Coverage
You should determine the type and amount of coverage that will be required to protect your business adequately. You may need to consult with an insurance broker to determine the appropriate coverage amount that reflects the risks and liabilities associated with the contract. You should also consider the cost implications of the coverage on your business’s bottom line.
Additional Insureds
You may want to include provisions that add additional parties to the insurance policy as insureds. This may be necessary if you are contracting with a third party who needs to be protected against any damages or losses that may arise. However, adding additional insureds may increase your insurance premiums, so make sure to negotiate who bears the additional cost.
Notice and Certificate of Insurance
The insurance clause should specify the notification procedures that the parties must follow in case of a claim or lawsuit. It should also require the parties to provide certificates of insurance to prove that they are carrying the required coverage. You should ensure that the certificate of insurance is accurate and up-to-date before signing the contract.
Exclusions and Limitations
The insurance policy may have exclusions or limitations that you need to be aware of. For instance, it may exclude coverage for acts of terrorism or natural disasters. You should negotiate to have these exclusions removed or mitigated, or alternatively, agree on how to allocate the risk between the parties.
Indemnification
Finally, you should consider adding an indemnification clause that specifies how the parties will allocate the costs of any claims or lawsuits that may arise from the contract. This clause ensures that each party bears responsibility for its actions and reduces the likelihood of disputes and litigation.
Drafting an Insurance Clause
When drafting an insurance clause, you should ensure that it is clear, specific, and enforceable. Here are some guidelines to follow:
Use Specific Language
The insurance clause should use clear and precise language that leaves no room for ambiguity or confusion. It should specify the type and amount of coverage required, the notification and certificate of insurance procedures, and any exclusions or limitations.
Allocate Responsibility
The insurance clause should allocate responsibility for the cost of the coverage and the claims or lawsuits that may arise. It should specify who bears primary or excess responsibility and how the parties will indemnify each other in case of a claim.
Include Appropriate Definitions
The insurance clause should define any technical terms or insurance jargon used in the contract. This ensures that all parties understand the meaning and implications of the clause.
Get Legal Advice
Finally, you should seek legal advice when drafting or negotiating an insurance clause. An experienced attorney can help you identify and mitigate any risks associated with the clause and ensure that it complies with the relevant laws and regulations.
FAQs
What happens if a party fails to carry the required insurance coverage?
If a party fails to carry the required insurance coverage, it may be in breach of the contract, and the other party may have the right to terminate the contract or seek damages for any losses incurred as a result.
Who is responsible for the cost of the insurance coverage?
The insurance clause should specify who bears the cost of the insurance coverage. Depending on the type of coverage required, the cost may be borne by one or both parties.
Can the insurance clause be amended after the contract is signed?
Yes, the insurance clause can be amended after the contract is signed, provided that both parties agree to the changes in writing. However, any amendments should be made with caution and reviewed by legal counsel to ensure that they do not invalidate the original contract or alter the parties’ rights and obligations.
What is an “additional insured,” and why is it necessary?
An additional insured is a party who is added to an insurance policy to receive coverage under the policy. It is necessary in some cases where a third party needs to be protected against any damages or losses that may arise from the contract.
What is the difference between primary and excess insurance coverage?
Primary insurance coverage is the first to respond to any claims or lawsuits arising from the contract. Excess insurance coverage, on the other hand, only kicks in after the primary insurance coverage has been exhausted. Primary insurance coverage is generally more expensive than excess insurance coverage.
Are there any limitations or exclusions to insurance coverage?
Yes, insurance coverage may have limitations or exclusions for specific risks or perils, such as acts of terrorism, natural disasters, or intentional acts. The insurance clause should specify any limitations or exclusions to the coverage and how to allocate the risk between the parties.
Conclusion
The insurance clause is a critical aspect of any commercial contract that cannot be overlooked. It protects the parties against damages or losses that may arise during the contract’s performance and assigns responsibility for any claims or lawsuits that may arise. To negotiate and draft an effective insurance clause, you should consider the scope of coverage, additional insureds, notice and certificate of insurance, exclusions and limitations, and indemnification. You should also use clear and specific language, allocate responsibility, include appropriate definitions, and seek legal advice. By following these guidelines, you can ensure that your business is protected from any unforeseen risks and liabilities.