Insurance Requirements in Vendor and Supply Contracts

What should the insurance section of a vendor or supply contract require?

The insurance section should name each required coverage, its limits, how long it must stay in place, whom it must protect, and the proof you deliver. Your policy should match those words, because Minnesota courts read the clause’s own language to decide what insurance you promised.

In Seward Housing Corp. v. Conroy Bros. Co., 573 N.W.2d 364 (Minn. 1998), a construction subcontractor had agreed to buy general liability insurance and never bought it. The Minnesota Supreme Court held that “the language of the subcontract itself defines the nature of the insurance Right-Way was obligated to provide.” The damage appeared at least a year after the subcontractor finished its work, so the claim “would fall within completed operations coverage not contemplated by the subcontract” and the court reinstated the dismissal of the contractor’s claim against the subcontractor. The words of the insurance clause set the limit of what the contractor could recover.

For a supplier of goods, the same point runs the other way. A product claim can arrive long after delivery, so a customer that wants protection for claims after its goods ship should ask for products and completed operations coverage by name, and a supplier should price that request before agreeing to it. In one engagement analyzing two national retailers’ vendor terms, one retailer’s insurance section required:

• commercial general liability insurance including product liability coverage, with products and completed operations coverage, contractual liability coverage for liabilities the vendor assumed under the contract, and personal and advertising injury coverage;
• coverage written on an occurrence basis;
• the retailer and its subsidiaries designated as additional insureds by endorsement;
• a waiver of subrogation, and coverage that is primary and non-contributory;
• certificates of insurance before the first shipment and at each renewal;
• insurance for the life of the goods, including claims brought after the retailer stops selling them;
• no self-insurance of the required coverage without the retailer’s written consent;
• separate workers’ compensation, automobile, and network security coverage.

Each item is a separate promise, and the sections below take them in turn. My page on supply and manufacturing agreements covers the agreement’s other terms.

How does additional-insured status work?

An additional-insured endorsement makes the customer an insured in its own right once the endorsement’s requirements are met, and the endorsement’s wording decides which claims against the customer it covers. The Minnesota Supreme Court read one policy’s endorsement covering injury caused by the named insured’s acts or omissions to reach only the additional insured’s vicarious liability, and it has given the phrase “arising out of” a broad meaning in an additional insured provision.

In Engineering & Construction Innovations, Inc. v. L.H. Bolduc Co., 825 N.W.2d 695 (Minn. 2013), a subcontractor’s policy covered the general contractor as an additional insured only to the extent that “the injury or damage is caused by acts or omissions of you or your subcontractor” in performing its work. The court held that this language “provides coverage to ECI as an additional insured only in instances of ECI’s vicarious liability for Bolduc’s negligent acts or omissions.” Vicarious liability means liability imposed on the customer because of your conduct, not its own. The court based that reading on “the precise wording of the provision as a whole” in “this particular insurance policy.” A jury had found the subcontractor not negligent, so the general contractor had no coverage for the pipe it paid to repair. The court noted that in other policies it has given the phrase “arising out of” a broad meaning in an additional insured provision. That reading requires only a but-for causal relationship between the named insured’s actions and the liability, meaning the liability would not exist without the named insured’s actions. Under such endorsements, “an additional insured could receive coverage with respect to direct liability, to the extent that the actions of the named insured were the “but for” cause of that liability.” Either way, additional-insured status does not “enlarge the insurance coverage as defined in the policy” and the policy’s own exclusions still apply.

The endorsement in Bolduc was a blanket form. It covered any person or organization the named insured agreed in a written contract to include. The policy reached injury occurring “After the signing and execution of the contract or agreement by you” while that part of the contract was in effect, and “Before the end of the policy period.” An injury that occurs before you sign the vendor agreement, or after the policy period ends, can fall outside an endorsement written that way.

The gap between the contract and the endorsement can be real. One national retailer’s terms I reviewed required additional-insured coverage that included claims brought directly against the retailer. An endorsement limited to injury caused by the vendor’s acts or omissions, read as Bolduc read one, may not deliver that. My pages on what happens when a retailer tenders a product claim and on an insurer’s duty to defend cover how the endorsement works once a claim arrives.

What does a certificate of insurance prove?

A certificate of insurance is evidence of your coverage and its amount. Under Minnesota’s insurance code, it gives the holder no contract rights and may not change what the policy covers without the insurance commissioner’s written approval, so the endorsement, not the certificate, is what can make your customer an insured.

Minn. Stat. § 60A.39, subd. 1 defines a certificate as “a document that provides evidence of property or liability insurance coverage and the amount of insurance issued, and does not convey any contractual rights to the certificate holder.” Under subdivision 2, “An insurer or licensed producer shall not issue a certificate of insurance or other document or instrument that either affirmatively or negatively amends, extends, or alters the coverage provided by an approved policy, form, or endorsement without the written approval of the commissioner.” A certificate issued to anyone other than the policyholder must contain this or a similar statement under subdivision 3: “This certificate or memorandum of insurance does not affirmatively or negatively amend, extend, or alter the coverage afforded by the insurance policy.”

Subdivision 4 limits what a certificate can promise about cancellation: “A certificate provided to a third party must not provide for notice of cancellation that exceeds the statutory notice of cancellation provided to the policyholder or a period of notice specified in the policy.” One national retailer’s terms I reviewed required certificates containing a clause obligating the insurer to give the retailer advance written notice of cancellation or material change. Under subdivision 4, a certificate cannot promise more notice than the statute or the policy provides.

For a customer, the useful document is a copy of the endorsement itself. For a supplier, sending the endorsement with the certificate answers the question before the customer asks it.

What does a waiver of subrogation do?

A waiver of subrogation is your promise not to pursue the customer for a loss your insurance pays. In a construction contract, the Minnesota Supreme Court has enforced a mutual waiver against an owner’s property insurer that paid a fire loss, where “the owner has relied upon existing all-risk property insurance coverage,” because an insurer that pays steps into its insured’s position and takes only the rights the insured kept.

Subrogation is the insurer’s right, after paying a claim, to sue the party responsible in its insured’s place. In Employers Mutual Casualty Co. v. A.C.C.T., Inc., 580 N.W.2d 490 (Minn. 1998), the court stated that “an insurer, as subrogee, is entitled to no greater rights than those possessed by the insured, the subrogor.” A medical center and its asbestos-abatement contractor had used a standard construction contract in which each waived its rights against the other for damages covered by property insurance. After a fire, the center’s property insurer paid the loss and sued the contractor. The court held that “Employers Mutual is barred from instituting a subrogation claim against A.C.C.T., pursuant to the waiver clause in the contract between Miller-Dwan and A.C.C.T.” The owner had relied on its existing all-risk property policy, which covered property beyond the contract work, and the court read the waiver to reach all damage that policy covered.

In a vendor agreement, the waiver can run from you: your liability insurer, after paying a claim, gives up any right to recover from the customer. One national retailer’s terms I reviewed required the vendor’s liability coverage to include a waiver of subrogation in the retailer’s favor. Because a waiver gives up your insurer’s recovery rights, your policy may restrict it. I suggest asking your broker to confirm in writing that the policy permits a waiver in favor of this customer, or to add an endorsement that does, before you sign.

What does primary and noncontributory language do?

Primary and noncontributory language asks your policy to pay a covered claim against the customer first, without seeking a share from the customer’s own insurer. The vendor agreement binds you to provide that coverage, but whether your insurer pays that way depends on your policy’s terms, because your insurer did not sign the vendor agreement.

When two policies cover the same loss, each one’s other-insurance clause states how it shares the loss with other coverage. When those clauses conflict, the Minnesota Supreme Court has said that “In Minnesota, this court does not simply look at the type of “other insurance” clauses involved.” Instead, it allocates “respective policy coverages in light of the total policy insuring intent, as determined by the primary risks upon which each policy’s premiums were based and as determined by the primary function of each policy” (Interstate Fire & Casualty Co. v. Auto-Owners Insurance Co., 433 N.W.2d 82 (Minn. 1988), quoting an earlier decision). That case involved a school district’s umbrella policy and a student’s family homeowners policy, and the court placed the loss on the umbrella policy that was written for injuries on school property.

I suggest asking for an endorsement stating that your coverage is primary and noncontributory for the additional insured, because that puts your contract promise into the policy that has to keep it. One national retailer’s terms I reviewed required the vendor’s coverage to be primary and non-contributory and to respond and pay before any other coverage available to the retailer.

How do insurance requirements interact with the indemnity clause?

The insurance requirement and the indemnity are separate promises. The indemnity states what you owe the customer, and the insurance is one source of money to pay it, so the vendor agreement decides whether the insurance limits anything, and a policy can cover less than the indemnity promises.

Of two national retailers’ terms I reviewed, one said that buying insurance and furnishing certificates would not modify the vendor’s agreement to indemnify, and the other said that the required insurance limits would not limit the vendor’s liability. Under terms like those, your policy limit marks what your insurer pays, not the most you can owe.

Whether your policy pays the indemnity at all depends on its contractual-liability terms. The policy in Bolduc excluded liability assumed by contract except liability assumed in what the policy called an insured contract, and the court explained that “the policy only provides coverage for liabilities assumed in a contract to the extent that the contracting party has assumed liability for another’s tortious conduct.” An indemnity that reaches beyond another party’s tort liability, such as a customer’s own business losses, may fall outside coverage written that way. I suggest asking your broker in writing whether the policy covers the indemnity you are being asked to sign.

A cap on your indemnity is a separate term you would need to negotiate. In a sale of goods, Minn. Stat. § 336.2-719 lets the agreement “limit or alter the measure of damages recoverable under this article, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts” and provides that “Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.” The section also provides that “Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this chapter,” and that “Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.” That section addresses damages under the UCC’s sales article; a cap on your contractual indemnity has to be written into the agreement. My page on how Minnesota courts read indemnification clauses covers the indemnity itself.

When does Minnesota’s construction-contract statute change the insurance clause?

When your contract is a building and construction contract, Minnesota’s agreements-to-insure statute voids a requirement that you insure the customer for its own negligence, subject to listed exceptions. It still allows a requirement to cover the customer’s vicarious liability, or liability imposed by warranty, arising out of your acts or omissions.

The statute’s chapter is written around one defined term. Under Minn. Stat. § 337.01, subd. 2, a building and construction contract “means a contract for the design, construction, alteration, improvement, repair or maintenance of real property, highways, roads or bridges.” The same subdivision provides that the term “does not include contracts for the maintenance or repair of machinery, equipment or other such devices used as part of a manufacturing, converting or other production process,” among others. A supply agreement in which you also install, repair, or maintain what you sell on a customer’s real property may be inside those words. The indemnity limit below reaches an indemnification agreement “contained in, or executed in connection with, a building and construction contract.”

An indemnification agreement is defined as one against liability or claims of liability “for damages arising out of bodily injury to persons or out of physical damage to tangible or real property” in Minn. Stat. § 337.01, subd. 3. In such a contract, an indemnity of that kind is enforceable only to the extent the injury or damage is attributable to your fault or the fault of those working for you. Under Minn. Stat. § 337.02, “An indemnification agreement contained in, or executed in connection with, a building and construction contract is unenforceable except to the extent that: (1) the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission, including breach of a specific contractual duty, of the promisor or the promisor’s independent contractors, agents, employees, or delegatees” (the section’s second clause applies where “an owner, a responsible party, or a governmental entity agrees to indemnify a contractor directly or through another contractor with respect to strict liability under environmental laws”). My page on when an indemnification clause is unenforceable covers that limit.

Insurance requirements follow Minn. Stat. § 337.05, subd. 1:

• The general rule. “(a) Except as otherwise provided in paragraph (b), sections 337.01 to 337.05 do not affect the validity of agreements whereby a promisor agrees to provide specific insurance coverage for the benefit of others.”
• The prohibition. “(b) A provision that requires a party to provide insurance coverage to one or more other parties, including third parties, for the negligence or intentional acts or omissions of any of those other parties, including third parties, is against public policy and is void and unenforceable.”
• Program exceptions. “(c) Paragraph (b) does not affect the validity of a provision that requires a party to provide or obtain workers’ compensation insurance, construction performance or payment bonds, builder’s risk policies, owner or contractor-controlled insurance programs or policies, or project-specific insurance for claims arising out of the promisor’s negligent acts or omissions or the negligent acts or omissions of the promisor’s independent contractors, agents, employees, or delegatees.”
• Vicarious and warranty liability. “(d) Paragraph (b) does not affect the validity of a provision that requires the promisor to provide or obtain insurance coverage for the promisee’s vicarious liability, or liability imposed by warranty, arising out of the acts or omissions of the promisor.”
• Railroad work. “(e) Paragraph (b) does not apply to building and construction contracts for work within 50 feet of public or private railroads, or railroads regulated by the Federal Railroad Administration.”

The policy itself is unaffected: under Minn. Stat. § 337.04, “Sections 337.01 to 337.05 do not affect the validity of any insurance contract, workers’ compensation agreement, construction bond, or other agreement lawfully issued by an insurer or bonding company.” Paragraph (b) reaches the contract’s requirement, not your insurer’s policy.

The words of the requirement still decide its reach. In Katzner v. Kelleher Construction, 545 N.W.2d 378 (Minn. 1996), decided before paragraph (b) was added, contractors had agreed to insure a design-builder against claims “which may arise out of or result from the Contractor’s operations under the Contract” whether during or after performance. The court held: “This language does not require Kelleher and Spancrete to purchase insurance for claims arising out of Ellerbe’s operations, Ellerbe’s acts or Ellerbe’s omissions.” For the contract’s separate indemnity paragraph, which it found “at best, ambiguous as to whether it was intended to indemnify Ellerbe from claims arising out of Ellerbe’s own acts,” the court applied the rule that “when the meaning of an agreement is uncertain all doubts and ambiguities must be resolved against the one who prepared it.”

What happens when the required insurance is missing or falls short?

In a building and construction contract, a supplier that agreed to specific types and limits of insurance and did not obtain and keep it in force must indemnify the customer for a claim within that insurance, to the same extent as the insurance. A narrow exception covers unavailable insurance disclosed before signing. Outside a building and construction contract, the shortfall is a breach of the insurance clause, and the vendor agreement’s terms shape the customer’s claim.

Minn. Stat. § 337.05, subd. 2 applies when the promisor agreed “to provide specific types and limits of insurance,” a claim “arises within the scope of the specified insurance,” and “the promisor did not obtain and keep in force the specified insurance” for it. In that case, “then, as to that claim and regardless of section 337.02, the promisee shall have indemnification from the promisor to the same extent as the specified insurance.” The measure is the insurance you promised, not the customer’s whole loss. In Seward, the contractor recovered nothing on the missing policy because the specified general liability coverage would not have reached damage that occurred after the work was done.

Subdivision 3 lets the promisor escape that indemnification only if both conditions are met: “(a) the specified insurance was not reasonably available in the market” and “(b) the promisor so informed the other party to the agreement to insure before signing the agreement, or signed the agreement subject to a written exception as to the nonavailable insurance.” Under subdivision 5, the obligation is not waived by “(2) a promisee’s acceptance of a certificate or other evidence of insurance that shows a variance from the specified coverage.”

Vendor agreements can contain the same protection. One national retailer’s terms I reviewed provided that the vendor’s failure to furnish a certificate, or the retailer’s failure to request one, would not be a waiver. When you find a gap after signing, I suggest asking your broker for the missing endorsement or limit right away and telling the customer in writing what you have and what you are adding.

How should a supplier negotiate the insurance section before signing?

A supplier should compare the insurance section with its actual policy before signing, then negotiate each requirement it cannot meet into something its policy can deliver, in writing. I suggest these steps, each for the reason given:

1. Sending the insurance section to your broker first and asking, in writing, which requirements your current policy meets, because a gap is easiest to fix before the agreement binds you.
2. Asking for the endorsements, not only a certificate, for additional-insured status, the waiver of subrogation, and primary and noncontributory coverage, because a certificate “does not convey any contractual rights to the certificate holder” under the insurance code’s definition in § 60A.39, subd. 1.
3. Matching the additional-insured wording to your endorsement, because in Bolduc the court read one policy’s wording covering injury caused by the named insured’s acts or omissions to reach only vicarious liability, and it has given “arising out of” wording a broad meaning.
4. Stating in writing, before signing, any coverage you cannot obtain, because in a building and construction contract § 337.05, subd. 3 excuses the promisor only if the insurance was not reasonably available and the promisor disclosed that before signing or signed subject to a written exception.
5. Disclosing deductibles and retentions, because in a building and construction contract § 337.05, subd. 4 makes you indemnify the full deductible or retention on a covered claim; my page on self-insured retention clauses explains how retentions work.
6. Fixing the insurance standards as of signing, because one retailer whose terms I reviewed put its insurance standards in a separate document that it could amend from time to time, and a later change could put a vendor out of compliance without a new signature.
7. Asking for a cap on the indemnity tied to your limits, because without one the limits mark only what your insurer pays.
8. Offering the cancellation notice your policy provides, because under § 60A.39, subd. 4 a certificate cannot promise more.

Next Steps for a Supplier

A customer’s insurance section is a set of promises you make in the contract, and your policy has to keep them through its endorsements. Under Minnesota’s insurance code, the certificate you send is evidence of coverage, not coverage, and in a building and construction contract chapter 337 voids a requirement to insure the customer for its own negligence, subject to listed exceptions. I suggest reading the insurance section against your policy with your broker before you sign, and settling the endorsements, the indemnity cap, and any coverage you cannot get in writing. My pages on vendor terms a national retailer sends and other vendor-agreement red flags cover the rest of the agreement, and more on these agreements is in my Minnesota contracts practice materials. If you would like me to analyze a customer’s insurance requirements against your policy before you sign, email [email protected] with a brief description.