The insurance clauses in commercial contracts that catch parties out, from limits to run-off

A commercial contract may require insurance, allocate liability or control conduct after a claim. The policy and contract are separate documents: satisfying one does not guarantee that the other responds. The following eight checks help a business in England prepare for legal and insurance review.

What to take away

1. The parties and insured entities

Match the contracting legal entity to the named insured. Check group companies, joint ventures, landlords, customers and subcontractors separately. If the contract requests an additional insured or an interest to be noted, ask the insurer what endorsement is available and what it changes.

2. Required policy type

Translate terms such as public liability, professional indemnity, product liability, cyber or motor into the actual loss the clause addresses. Do not assume a policy with the same heading covers the promised activity. Business.gov.uk's insurance guide gives a general description of common covers, but the operative wording controls.

3. Limits and aggregation

Record whether the stated limit applies per claim, per event, in the aggregate or across a period. Check sublimits and defence costs. A contract minimum does not prove that the amount is adequate, and a policy limit does not automatically cap contractual liability.

4. Territorial and jurisdiction scope

Identify where work, customers, products and claims may arise. Compare governing law, jurisdiction and territorial wording with the policy. Escalate overseas activity, sanctions issues and conflicting forum clauses to qualified advisers.

5. Duration and run-off

The contract may require insurance during performance and for years afterwards. Confirm whether the relevant policy responds to an event during the policy period or to a claim first made and notified during it. Plan continuity, retroactive dates and run-off with professional advice.

6. Waiver, subrogation and priority wording

Clauses may attempt to waive recovery rights, make insurance primary or prevent recourse against another party. Never promise these terms without insurer confirmation. They can affect underwriting, price and recovery and may require a specific endorsement.

7. Notification and claims cooperation

Compare contractual notice deadlines and control-of-defence provisions with the policy. Name who must notify the insurer, preserve evidence, communicate with the counterparty and approve admissions or settlements. Avoid contract language that forces conduct prohibited by the policy.

The Insurance Act 2015 contains statutory provisions concerning non-consumer insurance, warranties, fraudulent claims and other matters. It does not remove the need to analyse the wording and facts of the particular arrangement.

8. Evidence of insurance

State when a certificate, schedule or confirmation letter is required and who may receive it. Redact unnecessary premium and personal information. A certificate is evidence of stated cover at a date; it does not amend exclusions or confer rights beyond its terms.

Reconcile the two documents

Create a clause schedule with the contractual text, policy response, insurer confirmation, gap, owner and deadline. Involve the commercial lawyer and insurance adviser before signature, not after a claim.

Where liability is owed to a third party and the insured becomes insolvent, the Third Parties (Rights against Insurers) Act 2010 may be relevant. Its application and the underlying liability need legal analysis; it should not be reduced to a general promise of direct recovery.

Finish by recording accepted uninsured obligations and their approving authority. If the policy cannot meet a requirement, negotiate the contract, change the risk, obtain suitable cover or consciously reject the work. Leaving the mismatch undocumented is not a strategy.

Before you act

Common questions

Why does a contract minimum not prove the insurance amount is adequate?

The article states that a contract minimum does not prove the amount is adequate, and a policy limit does not automatically cap contractual liability. The limit may apply per claim, per event, in the aggregate or across a period, so the stated figure needs checking against the actual exposure.

What should a business do if its policy cannot meet a contractual insurance requirement?

The article says to negotiate the contract, change the risk, obtain suitable cover or consciously reject the work. It adds that leaving the mismatch undocumented is not a strategy, and that accepted uninsured obligations and their approving authority should be recorded.

How does the Insurance Act 2015 affect the checks described?

The article says the Act contains statutory provisions concerning non-consumer insurance, warranties, fraudulent claims and other matters. It does not remove the need to analyse the wording and facts of the particular arrangement, so the eight checks still apply alongside the statute.