If you’re a business owner like me, you know how tricky it can be to bring on new vendors. Even if you’ve worked with them for years and have a great relationship, you never know when a problem might pop up down the road. Requiring vendors to carry certain insurance policies and include key legal clauses in your contracts is so important to protect your company if the you-know-what hits the fan.

In this post, I want to walk through the essential insurance coverages and legal provisions you need vendors to have before you start doing business together. I’ll explain the different liability risks, how to shift that risk back to the vendor where it belongs, limit your own exposure, and make sure you’re legally protected if a vendor drops the ball. My goal is to help you feel confident that all your bases are covered so you can focus on the rewarding parts of growing your business.

Vendor Insurance Requirements

Let’s start with insurance. I know talking about potential worst-case scenarios isn’t fun. But you have to consider what could go wrong and make sure vendors carry policies that specifically address those risks. Here are the key insurance requirements I’d insist on including in any vendor contract:

General Liability Insurance

General liability insurance protects against bodily injury, property damage, personal injury, and advertising injury caused by the vendor. Require at least $1 million per occurrence and $2 million aggregate coverage. Make sure the policy names your company as an additional insured so you have direct rights under the policy. Require proof of current coverage before work begins.

Professional Liability Insurance 

Also called errors and omissions (E&O) insurance, professional liability insurance covers damages if the vendor makes a mistake, such as failing to deliver goods on time or complete services properly. Require a minimum policy limit of $1 million per claim for E&O. This protects you if the vendor’s failure to adhere to contract terms causes your company harm.

Cyber Liability Insurance

If a vendor stores or accesses your company’s private data, require cyber liability insurance to cover costs if the vendor experiences a data breach. This includes notification costs, victim restoration expenses, network damage, investigation fees, and legal costs arising from a breach. Require a $2 million policy as minimum protection.

Errors & Omissions Insurance

E&O insurance is critical for vendors providing professional services or deliverables based on their expertise. It covers the insured if mistakes, act, errors, or omissions result in client financial loss. Require technology vendors, consultants, accountants, architects and all professional service providers to carry E&O insurance with at least $2 million limits.

Workers’ Compensation Insurance

If a vendor sends employees to your work site, ensure the vendor has a current workers’ compensation policy per state statutes. This covers medical care and lost wages if employees are injured on the job. Requiring an employer’s liability limit of $500,000 provides additional protection if the vendor’s failure to maintain safe working conditions causes employee injury.

Vendor Legal Protections 

Well-crafted contracts provide legal protection and risk-shifting tools to limit your liability and prevent vendor problems from damaging your company. Key provisions to include:

Indemnification Clauses

Indemnification shifts legal and financial responsibility from you to vendors. Include broad indemnity requiring vendors to pay for your legal costs, claims, and damages arising from their negligence, errors, breach of contract, or intellectual property infringement. Cap your liability with a mutual indemnity limiting vendor recourse against you.

Limitation of Liability Clauses

Limitation of liability clauses establish financial caps on vendor damages if they fail to adequately perform duties. This prevents vendors from seeking excessive or disproportionate damages from you. Set a reasonable limit such as the contract value or your insurance coverage amount. Exclusions let you still recover damages caused by gross negligence, willful misconduct or intellectual property infringement.

Warranties and Guarantees

Require express warranties that goods conform to your specifications and are free from defects. Services warranties guarantee work will be completed in a professional manner according to industry standards. Secure warranty periods long enough to give you time to discover any latent defects or issues. Outline an acceptable remedy if the vendor breaches warranties, such as repair, replacement or refund. 

Confidentiality and Non-Disclosure Agreements  

Your contracts should prohibit vendors from sharing, selling or improperly using your confidential business information. Bind vendors and their employees to maintain confidentiality of your trade secrets, intellectual property and any sensitive documents or data accessed during their work. Require return/destruction of materials at end of contract term. Impose liability if confidential data is improperly disclosed or used.

Intellectual Property Ownership 

If your vendor is creating deliverables for you, include provisions establishing you retain ownership of all intellectual property in any materials produced for your company. Stipulate that vendors assign you rights if any IP rights initially vest with them. This ensures you retain perpetual use and control over custom deliverables.

Service Level Agreements

Service contracts should contain service level agreements (SLAs) where vendors guarantee performance standards and responsibilities. SLAs might set requirements for uptime, response time, issue resolution speed, service availability, delivery timetables etc. If SLAs are unmet, define penalties, service credits or other remedies you can invoke.

Conclusion

Protecting your business when working with vendors requires both insurance and contractual risk transfer. Ensure vendors carry adequate coverage types and limits to cover potential liability arising from their work. Limit your own exposure and secure legal remedies through key provisions in vendor agreements. Requiring proper insurance and inserting strong contract clauses reduces the risks of doing business with third-party vendors. With the right protections, you can feel confident bringing in qualified vendors to fulfill important business needs.