Supplier insurance in contracts - contract clause learning - Blog

When building your supply chain, supplier insurance in contracts is a crucial element that helps to mitigate the risks associated with working with external vendors. Supplier insurance is a contractual agreement between a buyer and a supplier that protects both parties in the event of loss or damage caused by the supplier. This type of insurance is designed to provide financial protection to the buyer in the event that the supplier fails to deliver on their contractual obligations.

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Purpose of Supplier Insurance in Contracts

The purpose of supplier insurance in contracts is to provide financial protection and mitigate risk for both the buyer and the supplier. Some of the key purposes of supplier insurance include:

Protection against losses: Supplier insurance provides financial protection to the buyer in the event of losses or damages caused by the supplier. This can help to mitigate the risk of working with external vendors and provide peace of mind to the buyer.

Compliance with regulations: Supplier insurance can help to ensure that both the buyer and the supplier are compliant with industry regulations. This can help to avoid potential legal issues and penalties associated with non-compliance.

Demonstrating commitment: By requiring suppliers to have insurance coverage, buyers can demonstrate their commitment to working with reliable and responsible vendors. This can help to build trust and strengthen relationships with suppliers over time.

Minimizing disruptions: In the event of a breach of contract or other issues, supplier insurance can help to minimize disruptions to the buyer’s operations. By providing financial protection, buyers can avoid potential delays or interruptions caused by supplier issues.

Example clause: Supplier insurance in contracts

Supplier Insurance Requirements

1. Insurance Coverage: The Supplier shall, at its own expense, procure and maintain in full force and effect, for the duration of this Agreement, insurance coverage of the types and in the amounts specified below. Such insurance shall be obtained from reputable and financially sound insurance companies acceptable to the Buyer.

2. Types and Amounts of Insurance:

• Commercial General Liability Insurance: Including coverage for bodily injury, personal injury, property damage, contractual liability, and products/completed operations, with a minimum limit of [Insert Amount] per occurrence and [Insert Amount] in the aggregate.
• Automobile Liability Insurance: Covering all owned, hired, and non-owned vehicles, with a minimum combined single limit of [Insert Amount] per accident for bodily injury and property damage.
• Workers’ Compensation Insurance: In accordance with statutory requirements of the jurisdiction(s) in which the work is performed and Employer’s Liability Insurance with a minimum limit of [Insert Amount] per occurrence.
• Professional Liability Insurance (if applicable): Covering errors and omissions arising out of the Supplier’s professional services, with a minimum limit of [Insert Amount] per claim and in the aggregate.
• Cyber Liability Insurance (if applicable): Including coverage for data breaches, privacy violations, and network security failures, with a minimum limit of [Insert Amount] per claim and in the aggregate.

3. Additional Insured and Waiver of Subrogation: The Buyer, its affiliates, directors, officers, employees, and agents shall be named as additional insureds under the Supplier’s Commercial General Liability and Automobile Liability insurance policies. All insurance policies shall include a waiver of subrogation in favor of the Buyer.

4. Evidence of Insurance: The Supplier shall provide the Purchaser with certificates of insurance evidencing the required coverage prior to the commencement of any work under this Agreement and upon renewal or replacement of each policy. Each certificate shall state that coverage will not be canceled, non-renewed, or materially changed without at least [Insert Number] days’ prior written notice to the Purchaser.

5. Subcontractors: The Supplier shall ensure that all subcontractors engaged in the performance of this Agreement maintain insurance coverage of the types and in the amounts required herein. The Supplier shall provide evidence of such insurance upon request by the Buyer.

6. Failure to Maintain Insurance: If the Supplier fails to procure or maintain the required insurance, the Buyer shall have the right, but not the obligation, to procure such insurance at the Supplier’s expense or to terminate this Agreement for cause.

7. Indemnification: The Supplier’s obligation to indemnify the Buyer shall not be limited to the insurance coverage required herein.

This clause is an exampled on howt the Supplier can be adequately insured, protecting the Buyer interests, and provides recourse if the Supplier fails to maintain the necessary insurance. Adjust the amounts and specific coverage types based on the particular needs of your organization and the nature of the contract. Always consult an expert before determining your own clause.

Determining value in Supplier insurance in contracts

When defining the amount for supplier insurance, several critical factors need to be considered to ensure adequate protection for both the procuring organization and the supplier. Here are the key considerations:

1. Nature of Goods or Services:
   • Evaluate the specific goods or services the supplier will provide. High-risk activities, such as construction or manufacturing, typically require higher insurance limits compared to low-risk services like consulting.
2. Contract Value:
   • The total value of the contract can influence the insurance amount. Higher-value contracts generally necessitate higher insurance limits to cover potential liabilities.
3. Industry Standards:
   • Review industry norms and standards for insurance coverage. Certain industries have typical benchmarks for insurance amounts that can guide your requirements.
4. Risk Exposure:
   • Assess the potential risks involved with the supplier’s activities, including bodily injury, property damage, professional errors, cyber threats, and other liabilities. Higher risk levels often require higher insurance coverage.
5. Regulatory Requirements:
   • Ensure compliance with local, state, and federal regulations that may dictate minimum insurance requirements for specific types of contracts or services.
6. Company Policy:
   • Align the insurance requirements with your company’s internal risk management policies and insurance standards.
7. Historical Claims Data:
   • Consider past claims data or incidents related to similar suppliers or projects to gauge appropriate insurance limits.
8. Geographic Location:
   • The location of the supplier’s operations and where the goods or services will be delivered can influence insurance needs. Different regions may have varying legal and environmental risks.
9. Customer and Stakeholder Expectations:
   • Take into account any requirements or expectations from customers, partners, or stakeholders who may be affected by the supplier’s performance and insurance coverage.
10. Financial Stability of the Supplier:
    • Evaluate the financial health of the supplier. Smaller or financially unstable suppliers may struggle to maintain high insurance limits, requiring a balance between adequate protection and realistic demands.
11. Potential Liability and Damages:
    • Estimate the maximum potential liability and damages that could arise from the supplier’s failure or misconduct. Ensure the insurance amount is sufficient to cover worst-case scenarios.
12. Duration of the Contract:
    • The length of the contract can impact the insurance requirements. Long-term contracts might necessitate sustained insurance coverage over a longer period.
13. Subcontractor Coverage:
    • If the supplier uses subcontractors, ensure that the insurance coverage extends to subcontractor activities or that subcontractors are required to maintain their own insurance.

Summary: Supplier insurance in contracts

In conclusion, supplier insurance is an important element of procurement contracts that helps to mitigate risk and provide financial protection to both the buyer and the supplier. By requiring suppliers to have insurance coverage, buyers can ensure compliance with regulations, minimize disruptions, and demonstrate their commitment to working with reliable and responsible vendors. As such, supplier insurance should be an essential consideration for any procurement professional when evaluating potential suppliers.

Learn more about General Terms and Conditions.

Note: Illustration to the blogpost “Supplier insurance in contracts” was created by Chat GPT on June 9, .

mpIn , German carmakers such as Volkswagen, BMW, and Mercedes were accused of using forced labor in their Chinese supply chains. It revealed the need for buyers to ensure due diligence is performed properly in supply chains, as part of compliance standards. Supplier compliance is important for organizations to maintain a good reputation and financial status. Read on and you will find out about some of the other best practices that your business should use…

Trustpair supports this through constant account validation to spot any anomaly or change in status, to ensure compliance with international regulations. Request a demo to learn more!

What is supplier compliance?

Supplier compliance is the process of ensuring that a third-party vendor meets the regulatory and industry requirements of the business it supplies. It also must comply with the business’s internal policies.

Being compliant means suppliers, partners, and service providers meet the same standards as your organization for optimal quality, safety, and industry fairness.

It is best to undertake the compliance process before the procurement of services and products, during the vendor onboarding stage for example.

External compliance

This refers to rules, requirements, and laws set by the government or a governing body. For example, NACHA governs the payment system ACH Network. NACHA’s rules clarify the responsibilities and roles of companies that use the network. This means that all payments on the network are dealt with equally.

External regulations set the industry standards for how organizations can and can’t act, usually through operational means.

An example of this is SOX law. This requires procedures to be implemented for the evaluation and control of data relating to third parties.

Internal compliance

Internal compliance refers to the rules set by the company itself. While breaking these rules doesn’t have the same penalties and risks as external regulations, they are still important (as you will learn in the next section).

It typically relates to employees and may include specific plans that should be followed based on certain events, as formalized in the internal control policies. However, it can also involve suppliers.

For example, British supermarket company Waitrose reintroduced its own form of internal compliance. That referred to charges for suppliers that were breaching delivery standards.

Over the pandemic, Waitrose suspended non-compliance charges. However, from April , the charges are set to return.

Now you know supplier compliance meaning, you need to know why it matters.

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Why is supplier compliance important?

Supplier compliance is important so that a business has oversight over its supplier operations. This means that the business can avoid supply chain issues or reputational damages. The impact of that is that the business doesn’t lose out financially because of a third party’s actions. Learn all there is to know about third-party risk assessment here!

So you don’t suffer, it is worth respecting the Know Your Supplier (KYS) principle. It ensures that an organization is aware of the validity of a business before dealing with it and that the partners and vendors are not criminals.

It is a similar concept to Know Your Client or Customer (KYC). However, it focuses on the legitimacy of the supplier as opposed to the identity of a person or customer.

That is because criminals often use companies to disguise their activities in fraud. It helps organizations take a risk-based approach to new and existing customers for security reasons.

All of this contributes to high-quality maintenance and avoids issues.

Deploying supplier compliance best practices like using automation tools to guarantee it is helpful. These tools can flag anomalies or a change in status with suppliers. As a result of that, there is more efficiency in the business.

By using a platform like Trustpair to automate the process, employees can spend their time on other matters of importance.

What are the consequences of non-compliance?

Financial damage

If laws, standards, and regulations aren’t upheld, an organization could be financially penalized.

Moreover, without full oversight of supplier non-compliance, businesses are left vulnerable to fraud. This is because the business could be dealing with another business that is illegitimate and plans to take advantage of having a close relationship with them.

That could allow the fraudsters to complete vendor fraud which can also have financial consequences.

Reputational damage

Word spreads in industries and if a supplier has failed to comply with the standards, it can reflect badly on your business. This could lead to the breakdown of deals and other suppliers, investors and clients may avoid working with you in the future.

Risk of fraud

Lack of compliance and due diligence can mean that businesses fail to spot suspicious behavior. For example, a B2B company could be unaware that their potential supplier has been added to an international blacklist. This is down to poor vetting practices.

Therefore, you wouldn’t know of any wrongdoing by the partner. That puts you at risk of being associated with a supplier who could be money laundering or partaking in fraud. Additionally, the business itself could also be defrauded at some point.

Compliance enforcement is part of a wider supplier risk management strategy, which is imperative in protecting companies against fraud.

Low performance

There could be a drop in performance if there aren’t standards in place that suppliers must adhere to.

What are supplier compliance best practices?

There are several steps to ensure an efficient supplier compliance management system. Having management systems like these in place makes for good processes:

• Due diligence
• Transparent communication
• Compliance training
• Assess supplier compliance
• Automate supplier compliance

Due diligence

Undertaking due diligence for potential suppliers before consolidating a deal can help you avoid suppliers that are non-compliant. This may look like the verification of licenses and checking their history of compliance.

For example, US lawmakers warn that there is an ‘extremely high risk’ that forced Uyghur labor is involved in making products that are sold on Chinese shopping site Temu.

Temu said it wasn’t responsible for sellers using the platform to sell a product.

This shows why buyers need to complete full due diligence on suppliers so they don’t face some of the consequences of non-compliance and can manage risks.

Transparent communication

Ensure there is clear communication between the buyer and the supplier so everyone is on the same page. The supplier compliance requirements must be understood and made official through a contract.

Buyers must ensure suppliers feel comfortable enough that they can raise compliance issues or problems and that they can be dealt with. Refusal of such terms should raise red flags.

Clear-cut communication can also help to align expectations of what is expected of both parties.

Compliance training

By bringing in compliance training for suppliers, you can ensure that the standards have been communicated and that suppliers are empowered to comply.

Additionally, this means that merchants are aware of the latest rules and regulations, limiting the chance of non-compliance.

Assess supplier compliance with audits

Supplier compliance management requires regular audits, with in-depth assessments of both internal and external regulatory compliance.

If suppliers know that they could be appraised at any point, they are more likely to focus on meeting legal standards and improving their own performance.

Partly automate supplier compliance

Integrating with platforms like Trustpair can help you to be compliant with regulations like the Nacha account validation rules and Know Your Supplier (KYS) rules.

The platform constantly monitors supplier data to notice any anomalies or changes in status such as suppliers being placed on international blacklists.  Working with Trustpair ensures that your suppliers are compliant with international regulations as you are aware of their data.

For more insights on supplier risks and securing the entire supplier lifecycle, download our white paper on vendor onboarding!

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