Liability Insurance and Contracts

Tom WallaceCommercial Coverage, Contracts, Liability Insurance

The last two posts were general explanations of liability insurance. Liability insurance is often required when entering into a contract with a retailer, wholesaler or distributor. Typically the entity with the most clout will require a contract to be signed. The larger and more sophisticated your client the more sophisticated the contract may be. Larger organizations may have a contract management or risk management staff in place to handle contracts with it’s vendors. Your insurance agent should be able to help you with the common provisions found in contracts so your insurance is in compliance.

Having a contract in place when two parties do business clarifies the relationship and the expectations. If you are asked to sign a contract with a larger entity there will be a section specifically for insurance requirements. The following provisions are typically encountered:

The client wants to be an Additional Insured

A very common request and one that is easily remedied by an endorsement to your liability insurance contract. Your client is looking to minimize their risk in offering your product. The name of the game in risk is “transfer.” Transferring risk is about making the people most responsible for the product bear the majority of the risk. Contracts will have hold harmless language included in them and require insurance to fund it.

Essentially an Additional Insured endorsement (there are a few kinds but we will keep it simple) provides coverage to your client if they were drawn into a lawsuit due to your product. Your client would prefer not to use their policy for defense and settlement of the claim. As an additional insured on your policy they can use your liability insurance policy for defense and settlement.

Additional insureds can be added one at a time or by endorsement. Endorsements exist that will give broad coverage to anyone requesting additional insured status via a written contract. This is helpful if there are numerous additional insureds but not all companies will approve the use of this endorsement. Adding additional insureds to your policy can range from no charge to $100 per additional insured.

Hired & Non Owned Auto Liability (even if you do not own a vehicle)

This coverage is a bit confusing to most people and it is understandable. This coverage has nothing to do with the ownership of a vehicle by your business.

This coverage protects your business from the use of hired or non owned automobiles in excess of the insurance that is on the vehicle. For example, your business is growing and you are going to begin supplying product to a regional grocery store chain. You typically have your product shipped via a common or contract carrier but because one location of the chain is so close to your home you save the shipping and drive over once a week to deliver your product. Your business has no commercial vehicle so you make a deal with your neighbor to use their pickup truck to make the delivery. When that is not possible your business rents a van for a few hours. The first example is a non owned auto and the second is a hired auto.

On the way to your clients location you get into a bad accident. First lets assume you have your neighbors pickup. Typically your neighbors insurer would pay for the liability and damage to the vehicle. But what if the limits were not enough or the insurance had been cancelled for some reason. The fact finding leads to your business and the fact that your client is the regional grocery store chain. General Liability policies exclude coverage for most incidents arising from a motor vehicle. In the example of the rented van lets assume you rent the van in the business name and deny all insurance coverages offered. Most likely it will not be covered under your personal auto policy (your business is not an insured) so with this endorsement attached the business would at least have liability coverage. Damage to the vehicle is a separate issue which we will not address here. Without the endorsement there would be no coverage.

This endorsement protects your business and maybe even your client from self insuring this exposure. Savvy clients will have this in their contracts as an added protection for them. The premium charge will be in the neighborhood of $150 per year but will vary. You may be able to negotiate it out of the contract but beware as this is an important coverage for your business in absence of a contract.

Waiver of Subrogation

Subrogation is a condition in most insurance policies. It essentially transfers your rights to collect from another party to your insurance carrier. This allows the insurance carrier the opportunity to recoup some of the funds either paid to you or paid on your behalf. Because this can cause tension between parties some contracts stipulate that this right is waived. This means your client agrees not to chase you and you agree not to chase them to recoup money paid by the respective insurance carriers. Endorsements do exist that can be attached to a liability policy that waive the insurance company’s right to subrogation. This typically will not cost anything but not all companies may be interested in waiving their right. In written contracts the mere signing of the agreement may bind the insurance carrier via contractual liability coverage contained in the policy but if you can do it up front it is much clearer to all parties.

Product Recall & Safety Notices

Product Recall may not be a required item in the insurance section but a section in and of itself.  This section stipulates how recall and safety notice expenses will be handled. You may have to bear these expenses outright when it applies to your product. More typically you will be required to reimburse your client for moneys spent on the recall or safety notice that applies to your product. Remember, Product Recall is EXCLUDED from general liability policies. Endorsements to add it back or a separate policy are the only way to fill the gap. Seriously consider the coverage (even if not required) as this process can be expensive. The new Food Safety Act also makes the regulations regarding recalls much more extensive than in the past. Look for future posts on this topic.

I hope this further helps you negotiate the liability insurance waters. As always, please contact me if you have questions or want another opinion on your current insurance program. Post a comment so we can start a dialogue. Specialty food and beverage is our passion so we are here to help.

Protecting you for the World’s Enjoyment.


Thanks for reading,