Insurance procurement clause

January 14, 2011

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Question

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Hi Ken,

    We are using your standard contract (as well as service & completion cert), which has been great, however I recently had a very "interesting" client who was extremely against the section 16 - "Insurance". 

    He refused to sign the contract with that clause in it, and went on and on about it.  In in the end, he signed it, although he made it known that he had no intentions of fulfilling the duties under that clause (So why he signed it, I don't know...).  However, I would like to know what level of importance you place on that section, and how strongly you would advise to fight to keep it in the contract if a future customer wanted to remove it before signing.  If you wouldn't mind going into some more detail on this, I would appreciate it!

Thanks!

T.J. Ogilvie, Director of Operations

Vantage Voltage, LLC

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Answer

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    My Standard Form Contracts contain an insurance procurement clause.  This provision requires the subscriber to obtain insurance related to the security services and name the alarm company as an additional insured.  If the subscriber complies the provision will accomplish two goals.  First, you will have insurance protection for the loss from the subscriber's insurance carrier.  This will probably be primary coverage and kick in before your own policy comes into play.  Second, since you are named as an additional insured, when your subscriber's insurance policy pays your subscriber for a covered loss it will not be permitted to pursue a subrogation claim against you.  The reason is that an insurance carrier cannot sue its own insured to recover the loss paid out on the policy. 

    How essential is the insurance procurement clause?  What is it's "level of importance".  Well, it's clearly not as important as the Exculpatory Clause or the Limitation of Liability Clause.  It is not as important as the Waiver of Subrogation Clause.  It probably equals the Indemnity Clause.  If you've ever called me during negotiations with a potential subscriber you know that I routinely suggest that the Indemnity Provision and the Insurance Procurement Clause be omitted if it's going to be a deal breaker for you.  Of course, you must have your own E&O coverage in place to really sleep at night.

    There are several arguments that I would make if the subscriber fails to name you in its insurance policy and then suffers a loss and sues you.  Perhaps the most accepted, and least helpful, is that the subscriber owes you the cost of the premium - in other words, you should have realized the subscriber's breach of the contract and "covered" by going out and getting the policy. 

    Another argument is that the subscriber is barred from suing because it breached the contract by not obtaining the insurance coverage.   Another spin is that the subscriber should be required to indemnify you at least to the extent of the insurance coverage that should have been purchased. 

    I haven't litigated the Insurance Procurement Clause [except in one small case where the Judge gave a credit for the cost of the premium - didn't matter because we got out on the Exculpatory clause -  PS - I forgot the case so don't ask].