You come to the client meeting with pen in hand, ready to sign a new contract. However, in reading the fine print, you see that it requires you to carry particular types of insurance. You ask yourself why that’s the case and what steps you will need to take to secure the contract.
Why Clients Require Contract Insurance
Typically, clients require contract insurance for one reason: to protect their interests in the event you fail to hold up your end of the bargain regarding fulfillment of the mutually agreed upon services.
Clients have the legitimate right to know that your business has the financial wherewithal to stand behind your services and, as such, may shield themselves against loss by drafting particular insurance requirements in the contract.
If a client feels your company fails to render service to the degree specified in the contract, he may file a claim. Even if the accusations are unfounded, and you are not at fault, it’s best to be insured.
Types of Contract Insurance Coverage Needed
Two types of contract-related insurance are often needed:
- professional liability
- general liability
Professional Liability Insurance
Professional liability insurance — also called errors and omissions insurance or E&O — protects you and your business from claims of negligence or failure to perform professional services.
General Liability Insurance
General liability insurance protects your business from third-party claims for bodily injury, associated medical costs and damage to another person’s property. Most contracts require at least $1,000,000 of coverage.
Two other types of contract-related coverages that clients may require are business owners policy and additional insured endorsement.
Business Owner’s Policy
A business owner’s policy — also known as BOP — combines general liability insurance and property insurance.
Additional Insured Endorsement
An additional insured is another person or entity added as an insured under your policy. It protects them from liability in case your actions result in a claim against them. Additional insured apply to general liability and property insurance. Most insurers do not include the endorsement in a professional liability policy.
Other Documents You May Need
Certificate of Insurance
Your client may require a Certificate of Insurance (or “Cert”) that provides evidence to a third party that an insurance policy is in place for you or your business.
It presents the type of insurance you purchased, the policy’s limits and deductibles, who it covers, the name of the insurance company issuing the policy and the effective and expiration dates.
Acord Insurance Certificate
An Acord certificate is a widely accepted certificate of insurance, which agents and brokers often issue.
Waiver of Subrogation
The Waiver of Subrogation prohibits the insurer, after paying a loss, from seeking restitution from a third party if they are partially responsible for the loss.
The Insurance Services Organization (ISO) creates industry-standard policy forms used by many insurance companies.
Primary & Non-contributory Clause
A primary policy is the first policy to respond to a loss or claim. Your clients may not want their insurance coverage to have to respond in the event your insurance and theirs can share the loss.
This clause states explicitly that your policy is the primary and that your client’s policy would only respond in the event your limits are exhausted, or your policy could not respond for another reason.
Broad Form Contractual Liability
Contractual liability insurance covers liability conveyed in a wide range of business contracts. Insurers provide this type of coverage on a blanket basis by the broad form comprehensive general liability endorsement.
As is evident by now, it’s easy to become confused by all the coverages, documents and forms that you may need or that the client may require.
That’s where a highly-trained insurance agent backed by a carrier that specializes in business insurance coverage can help. You may also ask an attorney to review the contract to make sure it is within legal bounds.
The bottom line: If your client requires contract insurance, make sure you have everything needed to protect your business against liability.
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