Risk management in contracts as it relates to insurance

An often overlooked part of contract negotiation is the area of risk management as it relates to insurance.  Sometimes, template contract precedents are rolled out for the procurement of goods or services without much consideration being given to the inclusion of appropriate provisions dealing with insurance.  Indeed, some precedents do not contain any provisions requiring a supplier to take out and maintain relevant insurance policies, such as product liability insurance or errors and omissions insurance.  A purchaser may in fact consider there is little benefit in negotiating the inclusion of appropriate insurance provisions because, at the end of the day, they would be unable to access an insurance policy taken out by a supplier with its own insurer.

However, there are many good reasons, from a risk management perspective, why a contract for the procurement of goods or services should include appropriately drafted insurance provisions.  For example:-

1. If the supplier is a new player in the market, a contractual obligation requiring the supplier to take out and maintain relevant insurance will compel the supplier to put in place strategies to identify, mitigate against and manage risks associated with its business, including the risk of any contractual claim being made against it by the purchaser.
2. A purchaser may be concerned that it will not have direct access to any proceeds available under a supplier’s insurance policy to satisfy a contractual claim.  If so, it is possible to place a contractual obligation on the supplier to name the purchaser as an insured person under the supplier’s insurance policy.  If this occurs, there is then a direct relationship between the purchaser and the supplier’s insurer.  The insurer may request an increase in the premium paid by the supplier to give effect to this arrangement.  However, and depending on the circumstances, the purchaser may be willing to reimburse the supplier for that additional premium.  This is particularly the case if this arrangement is an effective way for both parties to manage, and deal with, any risk of a contractual claim being made under the contract between the purchaser and the supplier.
3. If a template contract precedent contains insurance provisions, the parties should not always assume that the provisions are relevant to a procurement of goods or services.  In our experience, it is rare for a template contract precedent to contain a “one size fits all” approach regarding insurance.  For example, a contract precedent may require the supplier to take out and maintain product liability insurance.  However, that requirement will not, on its own, be relevant if the contract is for the supply of professional services or software development services.  In those circumstances, the template insurance provisions should be amended to require the supplier to effect and maintain professional indemnity insurance or errors and omissions insurance, as the case may be.  In this way, both parties will have taken appropriate steps to ensure that relevant insurance policies are in place.

From a risk management perspective, it is important to ensure that a contract for the procurement of goods or services contains insurance provisions that are tailored to meet the requirements of the contract. If you would like any further information, please contact one of our Corporate Advisory lawyers.

Author: Paul Dawson