Insurance Considerations When Negotiating Commercial Contracts

Insurance implications are routinely overlooked in commercial contracts. Contracts to receive or perform services, to supply or receive goods or raw materials, and contracts evidencing mergers and acquisitions all have their own insurance considerations that should be examined.

Many commercial contracts contain indemnification provisions, and often the indemnitor is required to name the indemnitee as an additional insured (AI) on its policies. It is important to understand the applicable indemnification law; indemnification provisions vary from a broad to the most narrow obligation. In addition, state law may limit how indemnity provisions are interpreted. Some states, for example, bar indemnification for another’s gross negligence. There have been recent revisions to standard form AI endorsements, and these changes seem designed to attempt to narrow coverage.

Mergers and acquisitions have significant insurance implications. One focus is on whether the acquiring company can access the insurance policies of the acquired company once the transaction is complete. Until fairly recently, it was generally assumed that a successor company could tap the historic insurance policies of the predecessor for latent liabilities. However, several cases since 2003 have changed the landscape on this issue, and courts are divided.

Representation and warranty insurance (RWI) has only recently become widely used. Companies should analyze whether RWI might be a way to shift certain risks to an insurance company.

Commercial contracts implicate a broad array of insurance issues. Update your commercial contracts from the insurance perspective to better protect your company.