What Are Vendor Insurance Requirements?
Essentially, vendor insurance requirements are requests from a business to its vendors to provide certain types and levels of insurance coverage. This acts as a way for the business to set the expectations about the risk that vendors assume in doing business with their company, and what they will be insured for. For example, a large construction company may request that its concrete suppliers provide it with a certificate of insurance showing that they have commercial general liability insurance and naming the construction company as an additional insured.
Although insurance might not seem to be the most exciting topic, it carries real potential consequences for a business if they do not manage their vendor insurance requirements correctly . For example, unless a business has sufficient insurance, they may be required by their contract with their vendors to indemnify them (i.e., hold them harmless) for any losses suffered while providing services to the business. This could be anything from a claim brought against the vendor because of their faulty product to the vendor’s breach of contract with the business even though the business is not at fault.
In short, depending on a business’ exposure and risk appetite and the specific circumstances applicable to the vendor, a business may want to require a number of different types of insurance. Some common forms of insurance that businesses consider requiring from their vendors are:
Insurance Policies Vendors May Be Required To Obtain
Vendors are businesses selling goods or services, and as such need to protect their operations against certain kinds of risks, and protect their customers against risks that may arise out of the vendors’ services or goods. There are a number of types of insurance policies for vendors. Most vendors have a general liability insurance policy even if the vendor does not sell products. If the vendor sells products or a service which involves providing a product, the vendor has a "products-completed operations liability" that most general liability policies will cover. This provides coverage if the vendor is sued for causing damage to another person’s property by selling, distributing, or installing a faulty product.
Also, although not usually required, many larger vendors buy workers compensation insurance to protect employees from injuries arising in the course of the employees’ jobs. An injured employee in Virginia cannot bring suit for negligence against the employer if the employee has a workers compensation policy. However, if the vendor employs people in more than one state, a workers compensation policy may be difficult to obtain in both states. Workers compensation insurance is not an attractive product for insurers because it is frequently purchased or forced on contractors. A vendor often chooses to obtain the insurance as a consensus of the parties because they are already under the supervision of the insured.
Professional Liability insurance, or "errors and omissions" insurance is also often obtained by vendors who are professional services businesses. "Errors and omissions" insurance provides coverage for negligent acts or omissions. Professional liability insurance is not required in Virginia but some professional licensing boards require insureds to have an "errors and omissions" policy. A potential customer may insist that the vendor has "professional liability" insurance to have a basis of recovery for negligence claims, since there will be no opportunity for a negligence claim if the vendor becomes insolvent. It is not possible to credibly obtain professional liability insurance coverage for risk arising out of the sale of goods because this requires a factual showing that there was professional neglect or error if you are being sued for selling a defective product.
General Liability insurance is similar to Professional Liability insurance. However, this is not available to professionals unless the insured is in a high liability risk industry. Also, the same types of exclusions for errors and omissions insurance are not similar. The standard exclusions are for the criminal acts or willful wrongdoing of the insured. Typically an exclusion for loss or damage will be excluded if there is a finding of wrongdoing or fraud.
How Vendor Insurance Benefits Both The Company And Vendor
Vendor insurance, usually required by businesses when procuring the services of outside service providers, affirms that the vendor (the outside service provider) maintains the types of insurance that will protect both parties from losses arising out of the services the vendor is providing. Normally, in addition to general liability coverage, the business hiring the vendor requires the vendor to maintain professional liability insurance and workers’ compensation insurance. At a minimum the parties agreement should affirm that the vendor will carry these types of insurance and will provide evidence of such insurance to the business prior to pursuing the contracted for services.
The benefit to the vendor of carrying the appropriate insurance is that the business will have to look to its own business insurance to cover claims against the vendor for negligent actions it (the business) may have taken during the course of contracting with and hiring the vendor. The benefit of such coverage to the business is that the party who was at fault in causing the loss will be responsible and the insurance company for that party will be liable under its policy for indemnifying the damage caused by the negligent acts of that party. The advantage to the parties is that absent this type of insurance coverage, the vendor may not have the financial capability to pay for the damage that was caused and the business would have to bear its loss, or pursue collections from a vendor that may or may not be capable of being collected from.
Writing Vendor Insurance Requirements
The drafting of vendor insurance requirements should encompass several key elements:
- Who. Specify the required insurance for each party to the vendor contract, including indemnity and defense obligations. The typical vendor contract contains an indemnity provision obligating the vendor to indemnify the customer for the acts of the vendor if causes the customer loss or liability. In addition, most vendor contracts have a defense obligation. Vendor contracts also will have an indemnity or defense obligation that obligates the vendor to indemnify or defend the customer for the negligence of the customer.
- What. Draft the requirements in a way that looks like an insurance policy, rather than a vague statement like "Vendor shall have commercially reasonable insurance." This type of wording is permissible, but it is not as comprehensive as it can be. A better way to draft the requirement is to spell out the exact type of insurance required and the coverage limits, the types of coverage, and any exclusions more specific to the work the vendor is doing for the customer. It may also be useful to require the vendor to provide full copies of all assessments and other documents associated with the coverage, so the customer can assess the adequacy of the coverage. Consider also requiring the vendor to certify that the vendor will renew the time and keep the customer as additional insured on renewal.
- When. Make sure you list the effective period of insurance for the policies being required. Some of these policies fluctuate over time, and the periods of coverage may need to be revisited.
- Where. Consider requiring that vendors be licensed in the states in which they work, in addition to requiring them to carry insurance in those states.
- How. Specify how you expect to receive the insurance paperwork, how many days in advance of beginning work and on an ongoing basis, and from whom. Will it be from the vendor, its parent or its agents? Will it only be required on signing or updated periodically? What is the customer to do if it does not receive the certificates or amendatory language, or if it has a question or concern about them?
Additional questions: Ensure that the customer has at least thought through some additional vendor insurance requirements not discussed above. Does it want its contractors to provide insurance? If so, what about subcontractors? Will the customer accept contractors carrying insurance with sub-limits, or certificate language only? What about additional insured coverage requirements, or additional insured endorsements? Require vendors to name the customer, the customer’s affiliates, and their respective landlords, directors, officers, employees and agents as additional insureds on a number of policies and endorsements. Does the customer require the vendor to name it as "additional insured" on the policies, or just require evidence of those policies covering the customer?
Checklist To Confirm Vendor Insurance
It is not unusual for a business to receive a certificate of insurance from a vendor. However, in order to determine if the certificate complies with the contractual requirements of the governing contract, the proposed vendor must make certain representations as to the amount of coverage in each category (commercial general liability; auto; workers compensation or employers liability; and other coverage, such as cyber liability). The amount of coverage might be listed under "General Aggregate Limit" (CGL), "Automobile Liability", "Workers’ Compensation & Employer’s Liability", "Personal and Advertising Injury Limit" (CGL), or some other category, depending on the type of insurance covered. Below are some terms to keep in mind in order to verify that the vendor has sufficient insurance coverage to meet the requirements of the contract.
- Contractors performing work on private property must provide the property owner a Certificate of Insurance and coverage from Workers Comp and liability insuring the owner of the project. The Certificate should also name the property owner as an additional insured.
- General Liability – this includes damage to the work performed , damage to the premises rented by the contractor, bodily injury, personal injury, and products-completed operations. It also includes completed operations, broad form contractual liability, and contractual liability for premises rented to the contractor.
- Automobile Liability – coverage for leased, owned, non-owned, or hired automobiles.
- Workers’ Compensation Liability – coverage for an employer’s liability to its employees.
- Excess Coverage – covers exposures not covered by the named policies up to the amount stated on the policy.
- Additional Insured – must include, where required per contract/lease/agreement: City of Philadelphia, Pennsylvania Convention Center Authority, the Authority’s Board Members, Officers, Agents, and Employees; Dancker; Temple University; Philadelphia International Airport; Macerich; the managing agent; any of the Authorities, its directors, officers, agents and employees as well as all other entities provided pursuant to the contract.
Legal Consequences For Inadequate Vendor Insurance
Contracts dictate the legal relationship between parties. While those relationships may change over time, many critical aspects of that relationship are determined at the outset by these legally binding, written documents.
In the context of vendor qualification, service contracts that define each party’s responsibilities and liability in the course of a business engagement play an important role in ensuring that each party’s equitable legal exposure is clearly spelled out.
Specifically, vendor insurance requirements are generally included in these contractual documents and designed to minimize the risks associated with doing business. However, if your vendors don’t maintain the required levels of coverage, it can expose you to huge liabilities when things go wrong.
When a vendor or service contractor fails to maintain proper levels of coverage as specified in your contract, the financial ramifications from damages which may arise in the course of the relationship can directly impact your bottom line.
"We’re fully covered…" While it may seem like common sense, many companies take their vendors at their word when they say they have sufficient levels of coverage. Unfortunately, in many situations this simple agreement is enough to put the company’s insurance policy on the hook in the event of a lawsuit. In fact, even if a vendor provides proof of coverage, unless you are able to verify that the certificate of insurance was obtained from the insurance company listed and not a third party source, you could be on the hook for any liability.
Greater risk after fire department lawsuit. For example, in 2013 a fire department in New Jersey was involved in a lawsuit with an equipment supplier. The supplier was required to carry $5 million in liability insurance. In an attempt to ensure the supplier had sufficient coverage, the department requested proof of insurance. The supplier provided a copy of their certificate – which apparently confirmed coverage. However, after the department was later forced to settle a $4.8 million lawsuit due to a malfunctioning piece of their product, they discovered that the supplier’s certificate had not been issued from the insurance company listed. Furthermore, the lawsuit had revealed that the supplier actually had less than $500,000 in coverage. As a result of this finding, the department sued their vendor to recover the money they spent in settlement of the case. This costly mistake (which ultimately cost the fire department their supplier) could have easily been avoided and should serve as a valuable lesson to all companies that deal with contractors and/or vendors.
Poorly written or incomplete contract terms. Beyond proof of coverage, using insurance endorsements strategically in your service contract is another way to protect your financial interests. For example, requiring additional insured endorsements to be issued in favor of you can help to ensure that if your vendor does not have sufficient levels of coverage, then the company’s insurance policy will still be available to cover damages. For example, a physician group that hires a janitorial service and requires them to name the group as an additional insured in their general liability policy, would be able to rely on the vendor’s insurance coverage if the janitorial services were negligent in preventing a slip and fall injury.
Customizing Vendor Insurance Needs For Various Vendors
Insurance requirements are not "one-size-fits all." Certain types of vendors provide unique, technical, or highly specialized services, which require additional oversight when it comes to reviewing certificates of insurance and other documentation. By customizing the insurance requirements for a vendor based on the vendor’s particular work, the hiring business can better ensure: 1) the vendor understands what insurance coverage it needs to carry; 2) the vendor is purchasing appropriate amounts of coverage for the work it will be performing; and 3) the business is receiving the level of protection it deserves under the agreement with the vendor.
For example , a janitorial service will have very different insurance requirements than a mining equipment supply company. Even though the janitorial service and the mining equipment supply company both provide products to the business, the end product does not affect the scope of damages that may occur as the result of the vendor’s work. A janitorial service’s work typically involves less risk of damages to the business’s property than other vendors, especially if the work is limited to interior services. Of course, if the janitorial service is also responsible for maintaining exterior structures and grounds, those risks increase.