Insurance Requirements in Commercial Agreements: What Coverage to Require and How to Verify It

By Hank FasthoffJuly 6, 2026

An indemnification clause is a promise. An insurance policy is the money behind it. If your counterparty agrees to indemnify you for third-party claims but doesn't carry insurance adequate to pay a judgment, the indemnification is backed by nothing except the counterparty's balance sheet, and that balance sheet may not survive the claim. Insurance requirements in commercial contracts exist to ensure that the risk allocation you negotiated is funded by a professional insurer rather than dependent on your counterparty's solvency.

Most commercial contracts require the parties (or at least the service provider, vendor, or contractor) to procure and maintain specified types and levels of insurance throughout the term of the agreement. Getting the requirements right means specifying the correct coverage types, setting minimum limits that reflect the actual risk, requiring endorsements that give you direct rights under the counterparty's policy, and verifying compliance through certificates and policy documentation. Getting any of those wrong can leave you with an unfunded promise that looks like protection but produces nothing when you need it.

Coverage Types

Commercial contracts typically require some combination of the following coverages, depending on the nature of the relationship and the risk profile of the work.

Commercial general liability (CGL) covers third-party bodily injury, property damage, personal injury, and advertising injury arising from the insured's business operations. CGL is the baseline coverage required in virtually every commercial contract. Standard CGL policies are written on an occurrence basis, meaning they cover claims arising from events that occur during the policy period regardless of when the claim is filed. Most commercial contracts require CGL limits of $1 million per occurrence and $2 million in the aggregate, though higher limits are common on larger engagements.

Professional liability (errors and omissions, or E&O) covers claims arising from the insured's professional services, including negligent acts, errors, and omissions in the performance of professional duties. E&O is essential for any engagement involving professional advice, consulting, design, technology services, or other expertise-based deliverables. Unlike CGL, professional liability policies are typically written on a claims-made basis, meaning they cover claims filed during the policy period regardless of when the underlying event occurred. Claims-made policies require attention to retroactive dates and tail coverage, because if the policy isn't renewed or extended after the contract ends, claims arising from work performed during the contract won't be covered.

Cyber liability (technology E&O) covers data breach response costs, third-party claims arising from data security incidents, regulatory fines and penalties, notification costs, credit monitoring, and forensic investigation expenses. Any contract involving access to personal data, customer records, or sensitive business information should require cyber liability coverage. Minimum limits vary widely depending on the volume and sensitivity of the data involved, but $2 million to $5 million is common for mid-market technology and services engagements.

Workers' compensation covers employees' work-related injuries and illnesses. Texas is the only state that doesn't require private employers to carry workers' comp, but most commercial contracts require it regardless of the statutory obligation. If a contractor's employee is injured on your premises and the contractor doesn't carry workers' comp, you may face a direct claim from the injured employee.

Commercial auto liability covers bodily injury and property damage arising from the use of vehicles in the insured's business operations. Contracts typically require a combined single limit of $1 million per accident covering owned, hired, and non-owned vehicles.

Umbrella or excess liability provides an additional layer of coverage above the limits of the underlying CGL, auto, and employers' liability policies. If the contract's risk profile warrants higher limits than the primary policies provide, an umbrella policy fills the difference. Umbrella requirements of $2 million to $5 million are common on mid-market commercial engagements, with $10 million or more on large-scale construction and infrastructure projects.

Setting Minimum Limits

Minimum coverage amounts should reflect the actual risk of the engagement, not a one-size-fits-all template. A $50,000 consulting engagement and a $5 million technology implementation involve different risk profiles, and requiring the same insurance limits for both either over-insures the small engagement (increasing the vendor's cost and, by extension, the contract price) or under-insures the large one.

When setting limits, consider the nature and scope of the work (physical work on premises creates different risks than remote consulting), the volume and sensitivity of data the counterparty will access, the potential magnitude of third-party claims (a product failure affecting thousands of users produces different exposure than a services engagement affecting one client), and the alignment between insurance limits and the liability cap in the contract. A liability cap of $5 million paired with insurance limits of $1 million creates a $4 million difference that the counterparty's operating funds would need to cover.

Require that all policies be issued by carriers rated A- VII or better by A.M. Best, which ensures the insurer has sufficient financial strength to pay claims.

Additional Insured Endorsements

Being named as an additional insured on your counterparty's CGL policy is one of the most important protections in any commercial contract. Additional insured status gives you direct rights under the counterparty's policy, meaning you can tender a claim to the counterparty's insurer and receive a defense and indemnification for covered claims, even though you didn't purchase the policy.

Without additional insured status, your only recourse when a third party sues you because of your counterparty's work is to invoke the indemnification clause in the contract and ask the counterparty to defend you. If the counterparty is insolvent, unresponsive, or disputes the indemnification obligation, you're defending yourself and seeking reimbursement later. With additional insured status, you go directly to the counterparty's insurer.

Not all additional insured endorsements provide the same scope of coverage. ISO form CG 20 10 provides additional insured coverage for ongoing operations (work being performed). ISO form CG 20 37 extends coverage to completed operations (claims arising after the work is finished). Most commercial contracts should require both, because a claim arising from completed work (a roof that leaks six months after installation, software that fails after deployment) would fall outside a CG 20 10 endorsement that covers only ongoing operations.

Your contract should specify whether the counterparty's insurance must be primary and non-contributory with respect to your own policies. "Primary" means the counterparty's policy pays first. "Non-contributory" means your policy doesn't contribute to the loss. Without this language, both policies may respond to the same claim, and your insurer may argue that the loss should be shared equally, which defeats the purpose of requiring additional insured coverage in the first place.

Waiver of Subrogation

When an insurer pays a claim, it acquires the insured's right to recover that payment from the party who caused the loss. This is called subrogation. If your counterparty's insurer pays a claim and then sues you to recover the payment (because your negligence contributed to the loss), the insurance coverage you thought protected you has turned into a lawsuit against you.

A waiver of subrogation endorsement (ISO form CG 24 04 for CGL policies) prevents the counterparty's insurer from pursuing subrogation claims against you. Your contract should require the counterparty to obtain a waiver of subrogation on all required policies, including CGL, workers' compensation, and auto. Insurers typically charge a small additional premium for this endorsement, and it's standard in commercial contracting.

Certificates of Insurance

A certificate of insurance (COI) is a summary document issued by the counterparty's insurance broker that provides a snapshot of the counterparty's coverage. The construction industry uses the ACORD 25 form as the standard COI format. COIs are useful for verifying that coverage is in place, but they have significant limitations.

Most COIs contain disclaimer language stating that the certificate is issued as a matter of information only and confers no rights upon the certificate holder. Courts have generally upheld this language, meaning a COI alone may not be sufficient proof that additional insured coverage, waiver of subrogation, or primary and non-contributory status is in effect. A COI that states "additional insured per attached endorsement" doesn't guarantee the endorsement was added to the policy.

To verify that the required endorsements are in place, request copies of the actual endorsements (not just the COI) from the counterparty or its broker. Review the endorsement forms to confirm they match the contract's requirements. If the contract requires CG 20 10 and CG 20 37 additional insured coverage and the counterparty provides a CG 20 26 (which covers only ongoing operations for designated activities), the coverage is narrower than what you required.

Require the counterparty to provide updated COIs annually or upon renewal of any required policy, and include a contractual obligation to notify you within a specified period (typically 10 to 30 days) before cancellation or material change of any required coverage.

Claims-Made Versus Occurrence Policies

CGL and auto liability policies are typically written on an occurrence basis, meaning the policy in effect when the event occurred provides coverage regardless of when the claim is filed. If a bodily injury occurs in 2025 and the claim is filed in 2027, the 2025 policy responds.

Professional liability and cyber liability policies are typically written on a claims-made basis, meaning the policy in effect when the claim is filed provides coverage, not the policy in effect when the event occurred. This creates a potential coverage problem when the contract ends and the counterparty lets the claims-made policy lapse. Any claim filed after the policy lapses (even for work performed during the contract term) won't be covered unless the counterparty purchases "tail coverage" (an extended reporting period endorsement) that extends the reporting window beyond the policy's expiration.

If your contract requires claims-made coverage, include a provision requiring the counterparty to maintain the policy (or purchase tail coverage) for a specified period after the contract ends (typically two to three years, matching the applicable statute of limitations for professional negligence claims). Without this provision, the counterparty can let the policy lapse the day the contract terminates, and you'll have no insurance backstop for claims that surface later.

How Insurance Interacts with Indemnification and Liability Limits

Insurance, indemnification, and limitation of liability are three separate risk allocation mechanisms, and they should be drafted as an integrated framework rather than three independent provisions.

Indemnification creates the contractual obligation to defend and compensate. Insurance funds that obligation. Limitation of liability caps the obligation. If the three aren't coordinated, the result is risk allocation that looks good on paper but doesn't function in practice.

If the indemnification obligation is uncapped (or subject to a super-cap of $5 million) but the counterparty's insurance limit is $1 million, there's a $4 million difference between what the counterparty has promised and what its insurer will pay. If the liability cap is $500,000 but the insurance coverage is $2 million, the counterparty is carrying more insurance than the contract requires, which isn't a problem but suggests the limits weren't calibrated to the engagement.

When drafting these provisions together, ensure the insurance limits are adequate to fund the indemnification obligation. Confirm whether the liability cap applies to indemnified claims (if so, the insurance should at least match the cap). Require that the additional insured endorsement provides coverage for the same categories of claims that the indemnification clause covers. And align the tail coverage period for claims-made policies with the survival period for the indemnification obligation, so the insurance backstop lasts as long as the contractual obligation.

Practical Recommendations

Specify coverage types, minimum limits, and required endorsements in the contract itself, not in a side letter or verbal agreement. If it's not in the contract, it's not enforceable.

Require both CG 20 10 (ongoing operations) and CG 20 37 (completed operations) additional insured endorsements on CGL policies. Requiring only ongoing operations leaves you exposed to claims arising after the work is finished.

Require primary and non-contributory language and waiver of subrogation on all required policies. These endorsements prevent your own insurance from being drawn into claims that should be covered by the counterparty's policies.

Don't rely on COIs as proof of coverage. Request copies of the actual endorsements and review them against the contract's requirements. A COI is a snapshot, not a guarantee.

For claims-made policies (professional liability, cyber), require tail coverage of at least two to three years after contract termination. Without tail coverage, the insurance protection disappears the day the contract ends, regardless of when the claim is filed.

Coordinate insurance requirements with the indemnification clause and the limitation of liability. All three should be drafted as parts of a single risk allocation framework, with limits, carve-outs, and survival periods that align rather than contradict.