Obtaining certificates of insurance from vendors
QUESTION: I’m the CEO of a large equipment company that acts as a dealer — we buy and sell fleets of equipment — but we also have a large and growing rental operation. I am considering requesting insurance certificates from more of my vendors, including manufacturers, and I’m wondering what would be reasonable to request, as I don’t want to start asking for things that nobody would ever consider providing. Please give me your thoughts on what you would consider to be a reasonable request.
Answer: Requesting certificates of insurance (COIs) from vendors has long been the norm in some industries, for example, transportation, but until the last 10 years or so, has been less common in the equipment and event rental industry. In industries where this practice is commonplace, for example, aviation, lists of requirements tend to be extensive. I recently negotiated a deal for an on-airport equipment lease in which just the insurance requirements for the supplier went on for eight pages. Though few equipment companies in other fields would ever consider going to that extreme with their suppliers, getting the right types and amounts of insurance from certain vendors now is more important than ever and it also is considerably more routine than it was in the past.
Most equipment companies realize, however, that “the longer the contract; the less likely it is to ever be signed.” This need for brevity makes it essential to identify and cover the most important insurance-related issues with respect to your vendors and suppliers, and then address each of those issues in writing in a legally sufficient, but concise enough manner to adequately protect yourself in one page or less — in print large enough to be seen by the naked eye.
So, let’s start with examining a list of what, in my opinion, are some of the most important insurance-related issues with respect to vendors and suppliers in the equipment and event renal industry. Note that the following list is intended to cover only the basics. Because the number and types of relationships with vendors and suppliers — we use the term “vendor” to cover both vendors and suppliers because the difference is immaterial for our purposes — the products they offer, and the potential risks they pose, come in all shapes and sizes, a thorough analysis of each vendor relationship should be made in each case.
Liability coverage. Most equipment dealers and lessors start with a demand for commercial general liability insurance, including personal and bodily injury, including death, property damage and contractual liability coverage. This typically covers bodily injury and property damage claims made by the dealer/lessor against the vendor and/or one or more of the vendor’s employees and/or subcontractors, often for some negligent act or omission in performing their duties — for example, damage done during delivery and/or installation of equipment.
Products liability. Particularly when purchasing equipment, dealers and lessors often also require products and completed operations — products liability — and product recall coverage. In broad terms, this is coverage for defects in the equipment purchased. Because product defects may manifest themselves only months or years after the original equipment purchase, resulting in potentially enormous products liability claims, and because, as a result, these particular types of claims have become an existential threat for so many dealers and lessors, we always try to include a requirement for this coverage when our clients are purchasing equipment.
Environmental liability. If the vendor or its employees and/or contractors will be working with hazardous substances while on any premises owned or operated by the dealer/lessor and/or its customers, we generally require the vendor to maintain environmental liability coverage, particularly where the threat of heavy fines and/or exorbitant remediation and cleanup costs could exist.
Commercial auto insurance. If the vendor’s vehicles will be entering onto the dealer’s/lessor’s premises or any real estate owned or operated by its customers — for example, a job site — coverage for vehicles, trailers and equipment while in transit now is commonly required.
Umbrella liability. Umbrella or excess — they are somewhat different, but both expand the originally contracted-for coverage — liability insurance covering at least the liabilities addressed in the above referenced policies has long been a common requirement. This is coverage for claims in excess of the basic liability referenced above, and in some cases with respect to umbrella coverage, other types of claims. Vendors often carry $5 million or more of such additional coverage because it is relatively inexpensive compared to basic liability coverage, and it offers substantial additional coverage for the money.
Property coverage. Usually next is all-risk, commercial property or inland marine insurance or an equivalent, covering all loss of, and damage to, all personal — i.e., non-real estate — property of the dealer/ lessor — including ordered equipment, pending delivery to and acceptance by the dealer/lessor. This can be important, particularly in cases where the vendor maintains actual possession and/or control of a dealer’s/lessor’s property, despite the fact that legal title has passed to the dealer/ lessor — for example, where the applicable contract’s shipping terms recite “FOB Shipping Point” — as many do — but the vendor, or its contracted shipper, actually delivers the equipment to the dealer’s/ lessor’s premises or the job site at some point thereafter.
Workers’ compensation insurance. Workers’ compensation insurance satisfying the laws of the state(s) which has/have jurisdiction over the vendor’s employees, including employer’s liability insurance for bodily injury, is often required, particularly when the vendor’s employees may be coming onto the dealer’s/ lessor’s premises or any job sites. Workers’ compensation coverage can be immensely important because it usually serves as an exclusive remedy for employees’ injuries — in most cases making it impossible for them to sue the dealer/lessor, general contractor and/or job-site owner when those employees are injured in connection with the vendor’s provision of services or equipment.
Professional liability. If the vendor or any of its employees and/or contractors maintain(s) a professional designation or license and/or will be providing professional services to or for the benefit of the dealer/lessor and/or its customers, requiring professional liability insurance has become relatively common.
Cyber liability and data breach coverage. Because disclosures of sensitive, and sometimes legally protected, information often are now necessary in connection with vendor relationships, additional coverage requirements for data security, breach and compromise also have become commonplace.
Defense costs. Finally, requirements that vendors maintain supplemental coverage for the cost to defend liability claims arising from or in connection with their products, though less common in the past, have in recent years, become more the norm.
Additional requirements. We typically require that, at a minimum, the above referenced policies satisfy the following additional requirements:
Basis and deductibles. To the extent possible, we require that the above referenced policies be written on an occurrence basis, rather than a claims-made basis. An occurrence basis means that the policy will provide coverage for occurrences during the policy period — effectively extending coverage into the future whether the policy is maintained or not; whereas, a claims-made policy only provides coverage for claims actually made during the term of the policy — thus, if the policy is terminated immediately after the vendor engagement expires, the dealer/lessor could be left with no coverage going forward unless a tail policy is purchased.
Insurers. We virtually always insist that the above policies must be maintained with insurers who maintain a financial strength rating of A- or better by A.M. Best Co. — the use of other ratings agencies, such as Fitch, Standard & Poor’s, Kroll, etc., is less common, but not unusual — are authorized to do business in the states in which the dealer/lessor conducts business and are otherwise reasonably acceptable to the dealer/ lessor. Financial strength ratings can be critically important for purposes of maintaining the actual value of the coverage sought; if the insurer lacks the financial wherewithal to pay claims, the policy could effectively be rendered worthless to the extent claims exceed the funds provided by a state guaranty fund. All states, the District of Columbia and Puerto Rico have a state guaranty association which funds claims the insurer cannot afford to pay, but those funds are generally limited other than with respect to workers’ compensation. There is no reason to take chances here.
Financial strength ratings can be critically important for purposes of maintaining the actual value of the coverage sought; if the insurer lacks the financial wherewithal to pay claims, the policy could effectively be rendered worthless to the extent claims exceed the funds provided by a state guaranty fund.
Additional insured. We virtually always demand the dealer/lessor as an additional insured except with respect to workers’ compensation. Additional insured status extends the benefits of the policy directly to the dealer/lessor, thereby entitling the dealer/lessor to submit claims and place coverage demands on the insurer.
Subrogation. We always try to include a requirement that the vendor’s insurer provide a waiver of subrogation against the dealer/ lessor, its owners, shareholders, officers, directors, and certain other parties on the dealer’s/lessor’s side of the table. Subrogation is the ability of the insurer to step into the shoes of the vendor and pursue claims against other parties, including the dealer/lessor. Thus, if the vendor’s insurer were to identify some fault or negligence on the part of the dealer/lessor in the course of pursuing or defending, perhaps, a larger overall claim, the insurer might feel compelled to subrogate and sue the same dealer/lessor it was supposed to be covering. A waiver of subrogation effectively eliminates the ability of the insurer to do so in most cases.
Primacy. Whenever possible, we require the vendor’s policies primary and non-contributory — the dealer’s/lessor’s insurance will be deemed excess. Insurers often seek contribution from other parties’ insurers — essentially, payment of all or a portion of a claim for which the original insurer would otherwise be liable. Doing so can cut down the original insurer’s cost dramatically by spreading it among one or more other insurers. This, however, also can result in forcing the dealer’s/lessor’s insurer to pay all or a portion of the claim — which can impact the dealer’s/lessor’s loss history and result in increased future insurance premiums and/or cancellations. We, therefore, typically include waivers of such contribution rights, at least up to the maximum payout available under the vendor’s policy, largely for the purpose of protecting our clients from such backdoor efforts by others to shift their rightful costs to our clients.
Severability of interests. It is generally also wise to require inclusion of a severability of interests, also known as a separation of insured, provision, which among other things, enables the dealer/lessor to pursue litigation against the vendor, with the knowledge that the vendor’s insurance coverage will nonetheless continue to apply in full and without exception or limitation, to both the vendor and to the dealer/lessor.
Term. Finally, the vendor’s coverage should be required to commence prior to entry upon the dealer’s/lessor’s premises by the vendor or any of the vendor’s employees, contractors, agents and/or representatives, and specify that such policies shall not be subject to cancellation for any reason without at least 30 days’ prior written notice to the dealer/lessor. Though at least one court has found that insurers are not legally required to provide such notice, most do so as a low-cost means of avoiding conflicts.
Vendor relationships can be deceptively complex, particularly given the vast array of products available in the industry, and the risks associated with each. Coverage for crushers and screens will differ materially from coverage for aerial equipment and telehandlers. So, use the above as a starting point for a discussion with your insurance advisor in an effort to get as much value as possible for the dollars you’re spending with your vendors — knowing that you won’t get what you don’t ask for.