Business owners and those acting on their behalf sign various contracts on a regular basis. Vendor/subcontractor agreements, property leases and equipment rental agreements are just a few examples of contracts that are commonplace in day-to-day operations.
A contract often contains a statement of indemnity—specifically, a promise that one party will protect the other by accepting the financial burden resulting from adversity, such as an alleged injury to a third party. For example, a grocery store (vendor) likely will require the product manufacturer (food processor or farm) to accept all costs related to a customer’s illness resulting from a contaminated product.
Before signing a contract, a business should always determine whether or not the contractual requirements are insurable. For instance, in the example above, if a sick customer were to file a claim against the grocery store, would the manufacturer’s liability insurance policy shoulder the burden and pay for any such costs? If not, the manufacturer will have no choice but to pay costs out of pocket.
Here are two considerations:
- Does the contract include an indemnity requirement? If so, is it insurable?
- Does the contract include a separate section outlining specific insurance requirements? If so, will the insurance satisfy the terms of the indemnity requirement?
Reviewing contracts is challenging and should be done with extreme care. Seeking the advice of qualified legal counsel is always recommended. For information on the insurance provisions of one of your business’s contracts, contact your insurance agent or broker today.
