Having insurance as a part of a contract with vendors, cities, partners, investors, and other professionals is common for VC-backed and non-VC-backed SaaS companies.
When clients approach us with questions concerning their insurance requirements, we don’t fault them. After all, insurance requirements in contracts can be full of legal jargon only a law professor can understand.
In this post, we will discuss the main reasons for requiring insurance as well as some of the most common situations. Having a better understanding of why these conditions are present in such contracts will help eliminate mental fuzziness and enable you to negotiate like a pro.
The Basics of Contractual Risk
As you may very well know, transferring a portion of your risk is simply good risk management. The main driver in this transfer is so that you don’t wind up with empty pockets because you failed to consider a risk.
Having a strong indemnity agreement in place can lower your chances of paying for a loss. This is a two-way street — covering your company and your client as well.
Ensure proper contractual risk coverage by following these five steps:
1. The risks and relationships must be analyzed.
Small jobs or services are just as risky as large ones, so it’s critical for your clients to grasp the range of the contractual work. The risk might be large even though the service is small. This case is one where size doesn’t matter.
When taking the correct approach to risk assessment, your client should ask the right questions. They should consider elements like the qualifications of the service provider (you), who is responsible for maintenance during the project, and what exactly is being accomplished through this job.
Taking into account what could go wrong is probably the best idea since sliced bread, remember that each situation is unique.
2. Hold Harmless Agreements
After your client effectively assessed the risk, the next step is to turn all safeguarding efforts into the appropriate language. Therefore, contracts are likely to include a Hold Harmless clause (or Indemnity agreement).
Using such language is meant to protect the client by assigning liability to your firm, if possible. This type of agreement is broadly interpreted, so the more specific it is, the better.
Unsurprisingly, many SaaS companies work hard to limit their obligations. In addition, there are limitations on how much your client can be protected. Everyone wants to protect themselves, so it’s crucial to understand how to navigate the twists and turns of legal language.
3. Choose the right insurance specifications.
In addition to a Hold Harmless agreement protecting your clients, you are also promising to pay for any damage you cause. Insurance specifications are also a part of this.
It’s critical to have the right insurance coverage and in the right amounts to honor any specific commitments your company may have. More on this later.
4. Verify if you are insured or not.
It is your duty (and your knowledgeable broker’s) to secure the appropriate insurance coverage. Remember that your client is likely to request two documents, the Certificate of Insurance and an Additional Insured (AI) Endorsement.
Furthermore, your client will ensure that all your T’s are crossed and your I’s are dotted, so you should do the same. In other words, be familiar with what you sign and why you sign it.
It is not usually a wise idea to alter the language or make unadvised changes to policy language. Also, keep a sharp eye on expiration dates in regard to the time frame of your contractual work. Finally, be open about what you offer your clients, insurance and otherwise.
5. Report claims ASAP.
When you dive into the world of VC-funded SaaS, you realize that most official items don’t fit under the rug very well. You must communicate promptly and succinctly—even when reporting claims.
Despite that, you will almost certainly be collaborating with your client to report any losses effectively. Claim reporting deadlines are often unwritten, so strong communication with your client is critical.
Why are insurance requirements included in contracts?
A contract requires both parties to be protected from certain damages, but that’s just the beginning.
Reduce the risk
An insurance policy is designed to lower your client’s chance of failing due to a scenario that occurs on your watch. They want to avoid losing out.
It is important to note that clients often use very specific contractual phrases with definite meanings. This means that you can often tell the professional aspect being protected simply by the contract’s layout.
Your clients will, of course, be particularly concerned about legal and compliance issues. However, in addition to those issues, you should be concerned about financial, reputational, and operational risks.
Good Faith
“Good faith” is a term used in business to describe an expectation of honesty. It is an agreement between parties to avoid fraud.
An insurance requirement in a contract is an indication of good faith, and it also helps to measure the trustworthiness of both parties. This, as you can imagine, contributes to the establishment of a healthy professional relationship.
Tender or RFP qualifying tools.
Because insurance requirements are beneficial to clients in a variety of ways, their inclusion in the qualifying process makes perfect sense. Clients often use insurance requirements as one of the more significant determining factors when vetting the services you offer.
Having a certain type of coverage doesn’t necessarily make you the right company for the job. Of course, you also have to provide excellent services or products.
You can be sure that obtaining certain insurance coverages will get you on a client’s list of trusted contractors. Because of this, insurance requirements are often used as qualifying tools for tenders or request for proposals (RFPs).
There are certain common insurance requirements in contracts.
Once you understand why your clients include insurance requirements in contracts, it is a good idea to be familiar with the most common ones.
What are the necessary policies?
General Liability
Almost all contracts require this particular policy. General Liability protects the 3rd party against physical injury or property damage resulting from your product or service.
Directors & Officers (D&O) Insurance
Investors typically require D&O insurance when working in a highly regulated industry or developing a new one.
Cyber Insurance
The data exchanged between you and the 3rd party requires Cyber Insurance to safeguard information. To respond and mitigate a data breach efficiently, the company must be provided with the proper recourse.
Tech E&O
If you are providing services or technology, E&O Insurance protects the 3rd party in case of a mishap. The policy provides the company with a means to make the client whole if an error leads to financial losses. In addition, most policies include unintentional breach of contract coverage.
Property Insurance
When leasing property to your company, the customer wants to ensure it is safeguarded in the event of a loss. Property insurance is necessary in most leases because the landlord’s property insurance doesn’t protect the renter’s contents.
But why these policies?
Limits
A standard contract for a company that is just beginning up will require $1 million in coverage for the coverages listed above. As the contract size grows, many third parties look for higher General Liability and E&O/Cyber coverage limits. Companies in Saas, Fintech, or other tech verticals will see much higher E&O/Cyber coverage limits.
Additional Insureds
It is common for 3rd parties to request to be added as an additional insured to the General Liability and E&O/Cyber policies. By being covered under your policy in case they are named along with your company in a lawsuit arising out of your company’s operations, they can be protected.
Waiver of Subrogation
A Waiver of Subrogation policy prevents the carrier from going after the 3rd party in the event of negligence. This clause is usually included in lease agreements or other contracts with banking partners with limited exposure to negligence on the part of the 3rd party.
Primary and Noncontributory Language
In the event of a claim, your policy will become the primary and sole responding policy. This condition is also frequently found in leasing agreements.
30 Days Notice of Cancellation
Prior notice to the 3rd party is required 30 days in advance if the policy is to be terminated.
Loss Payee or Loss Payable
Typically requested by a third party who is loaning you property or capital to include this provision, which allows the carrier to pay that third party for the loss directly.
Who requests insurance requirements in their contracts?
Sure, some clients will request insurance requirements in their contracts. However, some clients are much more predictable than others.
Governments, cities, and most states are among the most well-defined clients in terms of their contracts and professional connections. In other words, there will be few loopholes to exploit in a relationship with them. For example, electric scooters are required to add cities as additional insureds.
Vendors and service providers will also want specific things from you.
Landlords frequently request insurance requirements in contracts. Whenever real property is a part of a professional relationship, particular requirements ensue.
Many other professional relationships will make requirements as well. Of course, it depends on the size of the client and whether they formalize it in this manner or not. This is especially true for those in SaaS who handle large amounts of personal data.
Keep an eye out for this.
Some outlandish requirements should serve as red flags at times.
Keep an eye out for unusually high minimum occurrence and aggregate limits. These are not good signs and should be examined with your insurance broker. Your client may not be trying to swindle you, but they may lack the knowledge to properly manage the professional relationship.
There are also reasons to halt the project if the contract does not outline the required insurance coverage. Many clients are quite specific about their insurance needs in their contract language, but others will employ scattershot coverage in the hope of covering every possible scenario under the sun. Maintain focus on your job.
Don’t be reluctant to eliminate Hold Harmless language or similar language, as discussed earlier. Your client will prefer Hold Harmless language that is broad in the Indemnity agreement. However, there is such a thing as Hold Harmless language that is too broad. If the language makes your head spin, you should be concerned.
Be wary of clauses in the contract that provide for indemnification outside of the insurance requirements, as these are typically unprofessional and risky.