A Client Requires Insurance: What Should You Do?

  1. Don’t panic: when negotiating with enterprise-level clients, this is a pretty common request. 

  2. Accept that this is the cost of doing business with large brands and customers that should result in long-term payoffs, even after it takes a little longer to get the deal signed and the right insurance agreed and purchased. 

  3. Speak to an insurance broker or agent about what the client is asking for; 

  4. Consider the possibility the insurance requirements are not actually appropriate for your contract. What if the client is asking for coverage that isn’t needed? (for example, if they need auto and in-person insurance, and all of this work is remote, then chances are you don’t need as much coverage as their standard compliance terms)

  5. Negotiate to ensure the insurance requirements make sense for what you are providing, the client is happy,  and you aren’t paying ridiculously high premiums; 

  6. Once you’ve agreed on the insurance requirements with the client, make sure you have insurance policies in place that meets all the contract requirements.  

  7. If the client requests, get a Certificate of Insurance to provide to the client. In most cases, you will need a Certificate of Insurance to show proof of an active policy or policies that covers what was agreed. 

One big surprise for startup companies is when some potential new client tells them that, as part of the deal, the startup has to have all sorts of insurance in place. 

It isn't an uncommon scenario; with many big companies, insurance requirements are included into each contract they have just as a rule.  These companies need to be confident that your business can fully cover any costs or damages (more about damages here) should anything go wrong. 

Why Is Your Client Even Asking You For Insurance Coverage? 

Clients require insurance coverage to make sure that if something goes wrong, they can be fully and quickly compensated. They are concerned that if something serious happens, something that your company is on the hook for according to your contract, your company will actually have the ability to pay out all of the damages. 

Likewise, when a company has insurance in place, it is much more likely to actually go ahead and pay the damages quickly and without complaining -- the worst that happens is that you may have to pay higher insurance premiums when you renew your insurance policies. 

On the other hand, even if a vendor is flush with cash, if it doesn’t have insurance in place and the money is coming out of their own pockets, they are likely going to be much more motivated to lawyer up and try and fight the matter out. And these kinds of legal disputes can take years to resolve.

Can My Company Just Say No To Insurance Requirement?

You can try but don’t expect to close the deal with the client, especially if it’s a big company. These companies think long and hard about risk reduction requirements in their legal agreements. And, as a startup with perhaps very little money in the bank, you are going to be viewed as extra risky in this regard if you don’t agree to get their required insurance policies in place.

On the other hand, it’s not ridiculous to push back if the contract is very small (e.g., you’re a one person business doing some consulting work). Likewise (as we discuss in #4 below), you should definitely think about pushing back if the insurance requirements don’t make sense given the specifics of your contract with this client.  

How To Handle Being Asked To Take Out Insurance?

Step 1:  Don’t panic. As we said, insurance requirements in agreements with enterprise-level clients are fairly common. It doesn't mean they think your company isn’t going to deliver; this is simply something the client’s legal and risk management teams feels is necessary. 

Step 2:  Accept that this is a necessary requirement and cost of doing business with the sorts of companies and brands that will have a positive long-term impact on the growth of your company. 

This is also a standard requirement when dealing with personally identifiable information or mission-critical matters. Remember, it’s a once per year cost no matter how many clients require insurance: once you get the required insurance coverage in place because of one client, you don’t have to spend any more money when the next client asks for the same coverage. 

Step 3: If you don't currently have the right sort or level of coverage, speak to an insurance agent or broker to get coverage rate quotes and ask whether the insurance requirements are market standard or not.

Step 4: Consider if the insurance requirements are not actually appropriate for your contract. This is not that uncommon since usually a big company’s insurance requirements are one-size-fits-all, with the same requirements often included in every contract with a vendor. 

 What if some or all of the insurance requirements doesn't make sense for your agreement with the client? For example, if you are a SaaS company that delivers everything remotely/digitally, does it really make sense for a client to ask you to have automobile insurance or insurance to cover physical damage your employees may cause at the Client's location? 

Step 5: What if the client is asking for an insurance policy that doesn’t make any sense? Or if they're asking for something that is much too expensive for you or not market? You can negotiate. 

If, for example, you are agreeing a contract to deliver $25,000 worth of work, and they need $5M of coverage, and your broker says that’s just way too high compared to market standards, then work with the client and/or their legal team to agree the most appropriate insurance for the contract and work being delivered. 

Step 6: Once everything is agreed, confirm with your insurance broker or attorney that you can comply with all of the insurance language, including all the extra legalese that you often find included in the insurance requirements section of an agreement. Examples of this kind of legalese are:

  • The insurance policies will be primary and noncontributory with any of Customer's or Customer affiliates' insurance;”

  • “The insurance policies will include endorsements that name each of Customer and its Affiliates, and their respective owners, officers, and employees as an additional insured under the policies;”

  • The insurance policies will include endorsements that provide Customer with thirty (30) days prior written notice of cancellation, non-renewal or material change in the form or limits of coverage.”

Now, normally, you shouldn’t have a problem complying with these additional requirements. But sometimes, depending on the exact details, you won’t be able to comply with everything. If that’s the case, you want to know about before you sign the contract so you can talk to client and make any necessary changes. Otherwise, you could find yourself in breach of contract from Day 1. 

Step 7: If the client requests, get a Certificate of Insurance to provide to the client. In most cases, you will need a Certificate of Insurance to show proof of an active policy or policies that covers what was agreed.

MGLS: Helping you to navigate contract complexities, including those that require insurance: Ask A Question or Schedule a Meeting/Call

Disclaimer: This article constitutes attorney advertising. Prior results do not guarantee a similar outcome. MGLS publishes this article for information purposes only. Nothing within is intended as legal advice.

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