Insurance Clauses in Contracts: Everything You Need to Know
Most commercial contracts include certain provisions mandating that one party or the other carry some type of insurance which is a vital part of any agreement.3 min read
3. Severability and Non-imputation
4. Liability Restrictions
Insurance clauses in contracts are a vital part of any agreement. Most commercial contracts include certain provisions mandating that one party or the other carry some type of insurance. Such clauses may be included into commercial contracts if a party wishes to shift burden or liability to another party. To keep any unintended consequences at bay, you should consider all insurance options and include any provision that would safeguard you from legal fallout.
Make sure that the contract determines which party must obtain an insurance policy. Additionally, you should determine the circumstances in which an insurance policy would most useful.
When it comes to insurance policies, you must be aware of a “third party beneficiary” or “noted interest beneficiary.” For instance, large projects that include hundreds of contracted employees and/or subcontractors require an insurance plan that mentions them. The names of the contractors and subcontractors are not listed in the policy, but instead as subcontractor and contractor.
An indemnity is an agreement in which one party agrees to pay for any damages suffered by other parties. In regards to provisions mandating a party to get insurance on behalf of another party, consideration should be taken on how the insurance and indemnity provisions will co-exist. In this instance, you should ask yourself the following questions:
- Is the insurance in question intended as a form of security for indemnity performance?
- Is the insurance needed to cover certain losses in cases where indemnity would not be applicable?
Further, you must consider any exclusions to protect against uninsured liabilities that may hit you suddenly. Such an exclusion is also called a “contractual liabilities” exclusion. This is a clause that would exclude cover for assumed liabilities of the insured via:
Such an exclusion would also apply if the policy exceeded the liability of the insured. An underwriting intention of an exclusion itself does not exclude the main form of liability in which the insurance will respond because the liability itself is already in existence. With that, underwriters may not cover liabilities that are above general law mandates in regards to tort or breach of contract, unless parties include special terms in an agreement.
Severability and Non-imputation
In cases where an insurance policy covers insured people, it’s worth thinking of severability and a non-imputation clause within the policy. Severability means that disclosure and compliance failures by an insured will not affect the rights of other parties under the policy. Non-imputation operates so that all information on one covered person cannot be imputed another insured person.
Keep in mind that insurance follows the liability route, meaning there are difficulties in attempting to render liability in many cases. However, you can impose a liability cap that’s equal to the indemnity limit under your policy. There is no point in mandating insurance above the contractual cap because the insurer will never pay more than an insured person’s liability.
Moreover, do not make the mistake of mentioning in a liability clause that a party’s liability will be restricted to an amount recovered under the liability insurance. Unless the insured person is held liable, the entitlement under said policy can take place and no sum will be given to the insured. Therefore, the effect will be to provide an insured person with a noteworthy defense to any claims by the counterparty in a contract by limiting the liability to risk.
- Note: It’s common for insurance provisions to mandate that the party organizing the case submit Certificates of Currency to the other parties within the contract.
A Certificate of Currency is not an insurance policy, but a limited representation in regards to the policy that’s been procured. Certificates of Currency do not show gaps to cover or exclusions and provide a bare outline of the cover.
You should also make note of the obligation to maintain an insurance policy throughout a specific term, usually in areas pertaining to:
- Construction or defects maintenance times
- Term of leases regarding liability or property insurance
Further, there are insurance types which respond to certain events that may occur during a policy. With that, a professional indemnity and other financial liability insurances respond to all claims invoked under an insured person during the insurance period, despite the work having been completed.
To find out more about insurance clauses in contracts, submit your legal inquiry to our UpCounsel marketplace. UpCounsel will help you in all matters pertaining to insurance and to what extend you may be held liable under an agreement. Further, our lawyers can ensure that you shift liabilities from yourself to another party where necessary.