Insurance clause

What is an insurance clause?

An insurance clause in a contract says which insurance a party must carry while the contract runs, and how it proves it. It lists the types of coverage, the minimum limits, who must be named on the policy, and what happens if the coverage lapses.

The point is simple: an indemnity or a promise to pay for damage is only worth what the other party can actually pay. Insurance puts money behind the promise.

Example: a facilities company signs a cleaning contract with an office landlord. The insurance clause requires the cleaner to carry general liability insurance of at least $1,000,000 per occurrence, add the landlord as an additional insured, and send a certificate of insurance before starting work. If a cleaner’s mop bucket causes a visitor to slip, the cleaner’s insurer pays, not the landlord’s.

The term also has a second meaning: a provision inside an insurance policy, such as an appraisal or other-insurance clause. This page covers insurance clauses in commercial contracts.

What an insurance clause covers

1. The types of insurance. Which policies the party must hold. See the table below.
2. Minimum limits. Per occurrence or per claim, and in total per year (the aggregate).
3. Additional insured status. The other party is added to the policy, so it can claim under it directly for claims arising from the work. See additional insured.
4. Primary and non-contributory. The insuring party’s policy pays first, without asking the other party’s insurer to share the cost.
5. Waiver of subrogation. The insurer gives up its right to recover what it paid from the other party.
6. Insurer quality. A minimum financial rating for the insurer, for example from A.M. Best.
7. Proof. Certificates of insurance before work starts and at each renewal, often with copies of the endorsements.
8. Notice of cancellation. Advance written notice, often 30 days, if a policy is cancelled or reduced.
9. Duration. The whole term, and for claims-made policies a set period after the end.
10. Deductibles and subcontractors. Who pays the deductible, and whether subcontractors must carry the same insurance.

Types of insurance commonly required

The limits depend on the risk. A cleaning contract and a data center outsourcing deal need very different numbers, so ask your broker what is usual for the work.

Insurance clause vs. indemnity clause

The two work together, but they are not the same.

Check that they match. If the contract makes the supplier indemnify you for data breaches but only requires general liability insurance, the indemnity has no insurance behind it, because standard general liability policies largely exclude data breach claims. Some contracts tie the two together the other way round, capping the indemnity at the amount of insurance a party has to carry.

Certificates of insurance: what they prove and what they don’t

A certificate of insurance (COI) is a one-page summary of a party’s policies, in the US usually on the ACORD 25 form. It is the standard proof that the required insurance exists.

But a certificate is information only. It does not change the policy and gives the holder no rights of its own. Listing a company as “additional insured” on the certificate is not enough: the policy itself has to carry an additional insured endorsement. The same goes for primary and non-contributory wording and waivers of subrogation. If these matter to you, ask for copies of the endorsements, as one of the sample clauses above does.

Claims-made policies and tail coverage

Professional liability and cyber policies are usually written on a claims-made basis: they cover claims made while the policy is in force. A mistake made during the contract but discovered a year after it ends would be uncovered if the policy has lapsed by then.

Contracts deal with this in one of two ways: the provider keeps the policy in force for a set period after the contract ends, often two or three years, or buys an extended reporting period, also called tail coverage. Some clauses also require the policy’s retroactive date to fall on or before the start of the contract.

How to review an insurance clause

If you are the one who must carry the insurance:

• Check the requirements against your actual policies with your broker before signing. Endorsements cost time and sometimes money.
• Push back on limits and policy types that do not fit the work, such as cyber insurance for a contract with no data.
• Ask for “commercially reasonable” or “customary” wording where exact limits are hard to meet.
• Watch the duration. Keeping a policy for years after the contract ends has a cost.

If you are the one being protected:

• Match the insurance to the indemnity, risk by risk.
• Ask for endorsements, not only certificates, for additional insured status, primary and non-contributory and waivers of subrogation.
• Require notice of cancellation and a right to buy the insurance at the other party’s cost if it lapses.
• Make clear that insurance does not limit liability, so the policy limits are not read as a cap.

Insurance clause example

Keeping certificates up to date

Certificates expire every year, and an expired one is easy to miss when you work with dozens of suppliers. In fynk, the certificate goes on the supplier contract as a related file, and its expiry date is tracked with dates and renewals, which notifies the contract owner before it runs out. The contract calendar shows the upcoming expiries for all suppliers in one view, so you can ask for the new certificate before the old one lapses.

Which contracts include an insurance clause?

Construction and subcontracting agreements, commercial leases, service and consulting agreements, master service agreements, supply and distribution agreements, equipment leases, license agreements and loan agreements. These free templates include one:

Related clauses

• Additional insured An "additional insured" clause in an insurance policy extends coverage to other individuals or entities not originally named in the policy, typically providing them with the same protection as the primary insured. This clause is commonly used in business contracts to protect partners, landlords, or clients from potential claims related to the policyholder's actions or services.
• Waiver of subrogation A waiver of subrogation is a contractual provision whereby one party agrees to relinquish their right to seek compensation from a third party for losses covered by insurance. This clause is often used to prevent insurers from pursuing subrogation claims against other parties involved in the contract, promoting a smoother resolution of potential disputes.
• Mutual waiver of subrogation A mutual waiver of subrogation is a provision in a contract where both parties agree to waive their rights to seek compensation from each other for losses covered by insurance. This clause is typically included to prevent litigation and ensure that claims are handled solely by the insurance providers, minimizing conflict between the contractual parties.
• Duty to defend A duty to defend is an obligation to provide and pay for the legal defense of another party when a third party makes a claim against it. It starts when the claim is made, before anyone knows who is at fault, which makes it broader than the duty to indemnify. It appears in contract indemnities and in liability insurance.
• Indemnification and hold harmless The Indemnification and Hold Harmless clause requires one party to compensate the other party for any losses, damages, or liabilities arising from specific events or actions. It also ensures that the indemnified party is protected from any legal claims or damages related to the indemnifying party's actions or negligence.
• Subrogation Subrogation is a contractual clause that allows one party, typically an insurer, to assume the legal rights of another party, the insured, to pursue recovery from third parties responsible for a loss after compensation has been provided. This enables the insurer to seek reimbursement for claims paid out by holding the responsible third party accountable.

Frequently asked questions

• What is an insurance clause in a contract?

  A provision that requires a party to carry specific insurance during the contract, with minimum limits, and to prove it with certificates of insurance. It often also requires naming the other party as an additional insured.

• What insurance should I require from vendors?

  It depends on the work. General liability is the baseline. Add professional liability for advice or services, cyber liability for vendors that handle data, workers' compensation for staff on your premises and auto liability for vehicles.

• What is the difference between a certificate holder and an additional insured?

  A certificate holder only receives the certificate as information. An additional insured is added to the policy by endorsement and can claim under it. Being listed on a certificate does not make you an additional insured.

• What does primary and non-contributory mean?

  The insuring party's policy pays first, and it cannot ask the other party's insurer to share the cost. Like additional insured status, it has to be in the policy through an endorsement.

• Does an insurance clause limit liability?

  Not unless the contract says so. Well-drafted clauses state that the required insurance does not limit the party's liability, so it remains liable above the policy limits.