How to Protect Your Startup With Insurance Requirements in Vendor Contracts

Every startup will eventually have contracts with third-party vendors and suppliers to provide goods and services to the company. Taking proactive steps to ensure that the insurance requirements in your vendor contracts accurately reflect the needs of your company is vital to avoid complicated insurance issues and ensure that you are able to adequately recover damages from your vendors or suppliers if something goes wrong. If you are unsure what types of risks might be applicable to your company’s various vendor contracts, please speak with a member of the Perkins Insurance Recovery team.

State the types and minimum limits of insurance required

Your vendor and supplier contracts should clearly state the types of insurance your vendors and suppliers must obtain before doing work with your company, including the minimum limits of liability that you expect the vendors to carry. The types and amounts of insurance that you should require in any given contract will depend on the nature of the vendor/supplier relationship with your company and the goods and services being provided.

Get certificates of insurance from the vendor

Perhaps the most important thing is to require the vendor to provide you with a certificate of insurance. A certificate of insurance is 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 obtain the certificate until a problem occurs. You should 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 a claim is filed 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.

Make sure you are listed as an “additional insured”

You should be included as an additional insured on the vendor’s policies. Additional insured provisions take many forms, and you should ask your insurance broker or coverage counsel to review the additional insured provision in your vendor contracts in advance to make sure that (1) the additional insured coverage is “primary,” meaning the vendor’s insurer will pay first on the claim, avoiding disputes between your primary carrier and the vendor’s carrier, (2) if there is potential for liability after the contract is completed, any additional insured coverage should specify that it is for both ongoing and completed operations, and (3) coverage is not barred for claims by your company against the vendor pursuant to any “insured vs. insured” exclusions.

Also, it is not unusual for some vendor contracts to require you as the customer to add the vendor as an additional insured to your insurance policy. If the contract requires this clause, be sure that you work with your insurer to properly add the additional insured vendor as required by the terms of the vendor contract.

Common types of insurance

CGL Insurance. Commercial general liability (CGL) insurance provides coverage for the vendor in the event of an accident involving its premises, operations, and/or products. Be sure to require that (1) the vendor’s CGL policy does not restrict coverage based on contractual liability, (2) as mentioned above, your company is named as an additional insured on the policy, and (3) the vendor’s insurer waives its rights of subrogation.

Cyber Risk Insurance. If your vendor will be using, storing, or accessing any private, confidential, or protected information, be sure to require cyber risk insurance. Maintaining cyber risk insurance will ensure that your vendor is covered in the event of data breaches, which are increasingly common these days.

Property Insurance. 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. This coverage protects the vendor from errors and omissions (E&O) in the performance of its professional duties, such as software design, development, and implementation. If your vendor’s professional negligence in providing services could result in financial losses for your company, you may want to require that the vendor purchase E&O insurance.

Crime Insurance. If vendors have access to your company’s money or securities, you should require crime insurance. Crime insurance will provide coverage if an employee of the vendor steals or misappropriates funds from your company.

Media Insurance. Depending on your business, you may also want to require the vendor to maintain media coverage, which offers greater protection for liabilities relating to advertising and publishing activities than the more limited advertising liability provisions in a typical CGL policy.

Business Automobile Liability and Workers’ Compensation Insurance. Both of these coverages protect your company by ensuring that the vendor is adequately insured if 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 vendor contracts contain minimum limits and that your vendors provide you with proof of adequate coverage. Alternatively, your vendors 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 any of the primary coverages previously listed. While excess coverage sits above only one type 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 they 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, gaps in coverage could expose your company to risk. If this is a concern for any given vendor, you should review the applicable policy with the help of your insurance broker or coverage counsel to identify any gaps in coverage. For example, some policies carve back coverage with “non-follow form” endorsements.