It is easy to skim over your contracts’ insurance provisions or simply defer to risk experts, but here are a few questions you might want to consider the next time you review the insurance section of a contract.
- How do your indemnification and other risk allocation provisions interact with your insurance provisions? The proper allocation of risk in your contract is the first step. Indemnities, warranties, and similar provisions contractually allocate liability between the parties. That liability will exist regardless of whether the other party maintains insurance. If a contractually-allocated liability arises, the next question is whether the liable party has the financial wherewithal to fulfill its obligations. That is where the assets of the liable party and its insurance come into play. Requiring insurance helps to ensure the liable party will have the money to deliver on its contractual promise to satisfy the liabilities allocated to it in the contract. Watch as the other side may try to limit its obligation to indemnify you to the extent that its insurance policies cover the incident or costs in question. You may want to push back as this could unfairly limit your protection or cause a delay in receiving payment even if the insurance policy ends up covering such costs. The other side may also seek to limit its liability to amounts actually recovered from its insurance company. This should be rejected as the other side is maintaining insurance to help it satisfy its contractual liabilities, not to put a limit on them.
- What types of insurances and how much coverage should you require? The answer to these questions depends on what is being performed by each party under the contract, what risks are likely to arise from that performance, and how the risks are allocated between the parties in the contract. If a party’s contractual liability were to arise, would it have the assets necessary to satisfy them? The legal and business teams need to work together, and they in turn with the insurance experts on their team to make these determinations and then accurately reflect them in the contract. For example, if you or the other side is sharing or processing data as part of the contract, and the risk of a data breach is allocated to you or the other side in the contract (or under law), you may want to consider requiring cyber insurance coverage. “Classic” insurance policies may not cover data breaches or other unauthorized access to data.
- Will you know if there are changes to the insurance coverages? You may want to require the actual insurance policies themselves to include notification to you of any changes, cancellations, or expirations of the policies. If the policies themselves do not contain this requirement, you may want to contractually obligate the other side to give you advance notice of any such changes, cancellations, or expirations.
- Does your contract require the other side’s insurer to provide a waiver of subrogation? After you have allocated the foreseen risks between the parties in your contract, and provided for insurance to back up a party’s potential liability for these risks, you should consider whether you need to require a waiver of subrogation from any of the insurance providers. Subrogation enables an insurer to “step into the shoes” of its insured and assert a claim that the insured may have against the other party. Make sure that a party who has accepted a certain risk in your contract has released the other party for that risk in the contract. There will then be no contract claim that the insurer can assert through subrogation. The next step would be to require the applicable insurer to waive its right of subrogation in its policy. Require the applicable contract party to obtain the waiver of subrogation and to produce evidence of the same. This may require an additional premium to be paid and an endorsement to the base policy.
The foregoing considerations are just a few questions to pose while preparing and analyzing your contracts’ insurance provisions. Careful review should go into this section, as it could have enormous effect on your protection from risk and liability.