San Diego Business Contracts: Using Insurance Clauses can Help Avoid Litigation and Reduce Costs/Risks

The main function of business contracts is to set out the mutually-agreed obligations of the parties. Business contracts can also be used for secondary and tertiary purposes including reducing the likelihood of litigation and the risk of financial loss. A “maintain insurance” clause is an example of a provision that should be included in your San Diego business contracts to accomplish these secondary purposes. An experienced San Diego corporate attorney can help.

A “maintain insurance” provision requires that one (or both) parties to a given contract shall purchase and maintain insurance to cover various foreseeable liabilities. Commercial lease agreements are a common example where such maintain-insurance are included. A typical maintain-insurance clause might read like this:

“Insurance: TENANT shall purchase and maintain a general liability insurance policy to cover TENANT and LESSOR from any and all claims of any kind or nature for damage to property or personal injury that may arise from activities performed on the PREMISES. LESSOR shall be named as a named insured. Proof of insurance shall be required on demand. Coverage amounts shall be no less than $____________ for personal injury per occurrence and $____________ for property damage per occurrence.”

In practice, these types of provisions tend to be much longer. Generally, the party benefiting from and requiring the insurance coverage insists upon the right to buy the insurance if the other party fails to have or maintain the insurance.

Service contracts are another circumstance where insurance provisions are common. In the event that the service provided is substandard or faulty, generally the party purchasing the service can sue. If the service provider has no assets and also has no insurance, then winning the lawsuit will not benefit the purchasers since there will be insufficient assets against which to collect.

In addition to making sure that there are assets against which to collect in the event of a breach of contract lawsuit between the parties, there are other advantages of such clauses including:

• Requiring insurance as a measure of credit-worthiness and marketplace reputation since insurance coverage will be denied to certain high-risk, credit-deficient applicants
• Reduces financial risk to both parties in the event of third-party litigation since insurance will pay for most potential judgments
• Reduces the chances of litigation since an insurance payout will often be sufficient to compensate the victim of some accident; litigation can be time-consuming and distracting
• Reduces the cost of litigation, if filed, since the insurance carrier will — under normal circumstances — assume the cost of defense
• Helps insulate the second party to the contract — such as the lessor — from being brought into a potential lawsuit because the first party — the tenant — does not have assets or insurance to pay a judgment; any plaintiff needs to recover against a person or entity with assets

Contact San Diego Corporate Law

For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

You Might Also Like:

What Contracts Must Be In Writing?

Written Contracts 201: Intermediate Level

What is a Breach of Contract?  

“As-Is” Contracts Part IV: Avoiding Claims of Fraudulent Concealment

California Professional Corporations