Customer questions insurance procurement clause September 28, 2019

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Customer questions insurance procurement clause
September 28, 2019
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Customer questions insurance procurement clause

Ken
            Have a client that is ready to sign a 6K deal but has questions as to some of the language on page 3, part 21 of the contract, specifically this:
            “Client shall maintain a policy of Comprehensive General Liability and Property Insurance for liability, casualty, fire, theft, and property damage under which Client is named as insured and ABC is named as additional insured and which shall cover any loss or damage ABC's services are intended to detect to one hundred percent of the insurable value or potential risk"  © Kirschenbaum Contracts ™
            Client is asking why we would fall under his insurance. Is he reading it wrong? Can you dumb that part down for me?
Peter L
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Response
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            Problem is that the answer raises more questions and likely concerns and objection from the customer.  Why?
            It’s not unusual for the customer to challenge the insurance procurement clause.  And, if the customer asks an insurance broker rest assured that the broker will tell the client to object, strenuously.  After all, why should the customer’s insurance company have to insure the alarm company?  In fact, why isn’t the alarm company’s insurance covering the customer?
            The answer adds fuel to the fire.  The clause in question is an “insurance procurement” clause; it requires one party to get insurance and name the other party as “additional insured”.  This is quite different than a mere “certificate holder”, who is one who is given notice of cancellation of the policy but otherwise has no interest, or direct protection, under the policy.
            The additional insured is another matter because the additional insured does have direct rights and protection under the policy.  While those rights and coverage may be somewhat different than the named insured, for all intent and purposes, it provides coverage to the additional insured for the acts of the named insured, and that’s what is intended.  Additional insured can be “primary” so that it kicks in even before the additional insureds own policy.
            Here’s why it opens a can of worms to make too much of this particular challenge.  The alarm contract also requires the customer to indemnify the alarm company.  The additional insured status will therefore cover the customer for its indemnity obligation.  If we omit the insurance procurement clause and retain the indemnity provision the customer will be left providing indemnity personally with no insurance backup.  You asked for a dumbed down explanation, well the customer would be very dumb to agree to indemnity and not cover his butt with insurance.  Problem is that when you explain this to the customer you’re going to get a challenge to the indemnity clause.
            The insurance procurement clause serves another purpose; it acts as a waiver of subrogation because the insurance carrier can’t sue its own insured.
            There are several “protective” provisions in the alarm contract and they overlap in purpose and coverage.  We can give here and there with modification, but need to retain as much protection as the contract can provide.
            Perhaps the best answer you can provide the customer regarding the insurance procurement clause is not the dumb down version, but the more legally complex reason.  The alarm contract contains various provisions that acting together shift the risk for liability to the customer, not the alarm company.  The reason for this is that the alarm company is not charging anything close to enough to act as an insurer; alarm pricing typically has nothing to do with the potential risk, the cost of replacement or repair to property or items contained within the property.  No reasonable customer expects you to rebuild the building that burns down or pay for lost contents or inventory.  That’s why the customer carries insurance.  If the customer wants the alarm company to assume more or total liability for loss the cost of the alarm services are going to increase proportionately to the risk, and no customer is going to want to pay that cost.
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com