Supplier Insurance Best Practices, Part II

PurchTips edition #226


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Is Your Supplier Insurance Clause Complete?

In many situations, requiring suppliers to have specific insurance coverage is critical. However, not every supplier insurance clause is created equal.

Supplier Insurance

Carefully crafted supplier insurance clauses can provide more risk protection to your organization, keep your organization's insurance claim history cleaner, and make collecting on claims less cumbersome. Here are three components of an advanced supplier insurance clause.

Buying Organization Named As Additional Insured. Having your organization named as "an additional insured allows you to be a direct beneficiary of the [suppliers'] insurance policy," explains Brian Foont, an attorney and the founder of The Foont Law Firm, LLC. "If [suppliers] cause a casualty, I can go directly to their insurance company and file a claim as though I was them." Not having to go through the supplier to file a claim "presents a significant benefit in that I don't have to litigate with them to compel them to go and make that claim," according to Foont.

Primary Without Right of Contribution. "This means that, if there is a casualty, we look only to the supplier's insurance and not to the [buying] organization's insurance," Foont states. "That is, the supplier does not get to benefit from insurance that the [buying] organization may happen to carry. This is important because one of the key benefits to having your supplier carry insurance is avoiding claims against your own insurance and thereby developing a claim history [which] is a significant factor in increasing your insurance costs."

Breach of Warranty Clause. "When you purchase insurance, the warranties are what the insured is telling the insurance company they will or won't do," Foont says. "A breach of warranty clause in favor of an additional insured would say that even if [suppliers] violate that warranty," the insurance company will still provide the insurance to the buying organization.

As mentioned in Part I, you should always make sure that the insurance requirements are appropriate for the situation so as to not unnecessarily compel your supplier to inflate pricing.

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