Key Takeaways

  • An insurance clause specifies the type and amount of insurance one or more parties must maintain during the life of a contract.
  • These clauses help allocate risk, ensure financial protection, and often work alongside indemnity provisions to cover losses.
  • Common components include coverage requirements, policy limits, exclusions, severability, and ongoing maintenance obligations.
  • Certificates of Currency provide proof of coverage but do not reveal exclusions or coverage gaps.
  • Specialized clauses may address subrogation waivers, notice requirements, and event-triggered coverage for industries like construction, leasing, and professional services.

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.

Indemnity Contracts

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?

How Insurance Clauses Interact With Risk Allocation

Insurance clauses are a critical tool in risk allocation. When combined with indemnity provisions, they ensure that the responsible party has the financial means to fulfill its obligations if a loss occurs. For example, a contractor may be required to maintain commercial general liability insurance not only to cover potential damages but also to guarantee that the contractor can perform its indemnity promises. A well-drafted insurance clause will clearly define the types of policies required—such as workers’ compensation, professional liability, or property insurance—and state minimum coverage amounts. This clarity helps avoid disputes and ensures that coverage is aligned with the scope of potential risks.

Exclusions

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:

  • Indemnity
  • Guarantee
  • Warranty
  • Agreement

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.

Common Types of Required Insurance Coverage

Insurance clauses can mandate a variety of policy types depending on the nature of the contract:

  • Commercial General Liability (CGL): Protects against bodily injury, property damage, and personal injury claims.
  • Professional Liability (Errors & Omissions): Covers negligence in professional services, common in consulting, law, and design contracts.
  • Workers’ Compensation: Provides statutory benefits to employees injured during work.
  • Property Insurance: Covers loss or damage to specified property, which may be owned, leased, or under a party’s control.
  • Automobile Liability: Required when transportation or delivery is part of the contracted work.
    Each policy type should be paired with clear limits and, when applicable, list the counterparty as an additional insured to strengthen protection.

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.

Waivers, Endorsements, and Notice Requirements

Many insurance clauses include waivers of subrogation, which prevent the insurer from pursuing recovery against the other contracting party after paying a claim. Another key element is the requirement for policy endorsements—modifications that tailor coverage to meet the contract’s specific needs, such as extending coverage to affiliates or subcontractors. In addition, some agreements require advance written notice—often 30 days—before a policy is canceled or materially altered. These provisions give the non-insuring party time to respond, potentially securing replacement coverage or adjusting operations to mitigate risk.

Liability Restrictions

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.

Event-Triggered and Industry-Specific Insurance Clauses

Certain contracts require insurance coverage that responds to specific triggers or industry risks. In construction contracts, “builders risk” or “course of construction” policies protect materials, fixtures, and structures during the build phase. In commercial leases, landlords often require tenants to carry liability and property coverage throughout the term. Professional services agreements may include “claims-made” policies, where coverage applies only if the claim is made during the policy period, regardless of when the underlying work occurred. Tail coverage—extending protection beyond the active policy term—can be critical in these cases. Such tailored provisions ensure that insurance protection aligns closely with the unique exposures of the project or relationship.

Frequently Asked Questions

  1. What is an insurance clause in a contract?
    An insurance clause is a provision that requires one or more parties to obtain and maintain specific insurance coverage for the duration of a contract to manage and allocate risk.
  2. Why are insurance clauses important?
    They provide financial protection, ensure compliance with legal or industry standards, and help guarantee that a party can meet its indemnity obligations.
  3. What types of insurance are commonly required in contracts?
    Common requirements include commercial general liability, workers’ compensation, professional liability, property insurance, and automobile liability coverage.
  4. What is a waiver of subrogation?
    It’s a provision that prevents an insurer from seeking reimbursement from the other party after paying a claim, thereby avoiding legal disputes between contracting parties.
  5. Do Certificates of Currency show full coverage details?
    No. Certificates of Currency confirm that a policy exists but do not list exclusions, limitations, or the complete scope of coverage.

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.