This is the first post in a series regarding insurance terms that are commonly encountered (but sometimes, poorly understood) in commercial contracts. 

Whether you are drafting business contracts, reviewing them, or are a party to them, you will encounter insurance clauses. Insurance requirements are common in commercial contracts and have been for decades.  This includes commercial leases, licenses, subcontractor arrangements, and merger or asset purchase agreements. 

Some of these clauses were heavily negotiated, other times they seem like mere boilerplate which was lifted from a form book decades ago. Without an understanding of insurance law, you may bargain for terms in the agreement that do not actually provide the sought-after coverage to protect from a possible loss. 

Whether you are drafting agreements or simply reviewing older contracts, it is important to understand insurance law or to work with an insurance broker or insurance lawyer. Without an understanding of common issues and pitfalls, a party may believe that insurance exists to provide financial security to a transaction, when actually no insurance exists or coverage would be speculative at best. 

Outdated terms which no longer apply. 

Older documents (or new documents based on old forms) may include outdated insurance provisions. For example the common CGL policy was renamed from “Comprehensive General Liability” to “Commercial General Liability” nearly thirty years ago, however some commercial agreements still have the old language. And if a client wants to be defended against personal injury lawsuits, it needs a policy which provides coverage for “bodily injury.” Under common insurance law and the modern CGL policy, “personal injury” means non-bodily injuries such as defamation, the tort of invasion of privacy, wrongful eviction, and advertising injury. Contractual language which requires a party to obtain an outdated product – a commercial impossibility – does nothing but unnecessarily strain the relationship between parties. 

Requests for additional insured status. 

A contract may require the counterparty to add your business as an additional insured. Anyone added as an additional insured must know the limitations to additional insured status. For example, the  ability to gain coverage is only derivative of the first named insured; an additional insured has zero coverage for any independent claim that does not involve the first named insured. Similarly, certain policies do not permit naming additional insureds, such as worker’s compensation policies. In other situations, because certain policies typically include insured vs. insured exclusions, naming a person or entity as an additional insured may actually serve to negate or reduce coverage rather than extend coverage in certain circumstances.