How to Check Your Customer Contracts Against Your Policies

To check your customer contracts against your policies, pull the contracts that matter most, copy every insurance and indemnity requirement into one requirements matrix, and compare each line with your declarations pages and endorsements, not your certificates. Whatever does not match goes on a gap list with a fix and an owner. This guide is for new owners who want a repeatable method they can run in a week and keep up as new contracts arrive.

Which contracts should I check first?

You probably inherited more contracts than you can read in a week, and some have no insurance terms at all. Rank them so the first pass covers most of the risk:

• Revenue. List customers by trailing twelve months of revenue and take enough of the top to cover most of it. For many small businesses that is a short list of top accounts, not the whole customer base.
• Risk. Add any customer where your people work on their premises, where you give professional advice or design, where you touch their systems or data, or where a failure could cause large property damage or injury.
• Timing. Add any contract renewing in the next 90 days, because that is your chance to renegotiate.

Your lease and your loan agreement carry insurance requirements too. Treat them as two more rows in the same matrix; see lease insurance requirements and lender insurance requirements after closing.

Where are the insurance and indemnity clauses hiding?

The insurance exhibit is the obvious place, but requirements often sit elsewhere in the paperwork. Check each of these for every contract on your list:

• Insurance section or exhibit: lines of coverage, limits, additional insured, waiver, primary wording, notice of cancellation, carrier rating.
• Indemnification: what you promise to pay for or defend on the customer's behalf. Liability policies often cover some liability assumed in a contract, but not every promise in every clause.
• Limitation of liability: caps or carve-outs that change how much exposure you actually carry.
• Statements of work and purchase orders: their standard terms can add or override insurance terms in a master agreement.
• Documents incorporated by reference: supplier codes, vendor manuals or site rules the contract says you must follow.
• Assignment and change of control: whether the contract moved to your entity and on what conditions. That is a legal question for deal counsel, but it decides whose name must appear on the policy.

How do I build a requirements matrix?

Use a spreadsheet with one row per contract and one column per requirement. Copy the contract's own words into each cell where the wording is specific, because the details matter: ongoing versus completed operations, which policies the waiver must apply to, and whether an umbrella can count toward the limit.

Add two more columns: the governing document and page number, so you can find the clause again, and the contracting entity with its assignment status (seller's entity, assigned to yours, or consent pending), so you know whose name the policy and certificate must show. For the loan row, record the property requirements (a mortgagee clause on real estate, a lender's loss payable clause on equipment and inventory) in the Other lines column, and check them against the property policy's endorsements. The dollar amounts above are examples, not recommendations.

How do I compare the matrix against my policies?

Compare against the policies, never against a certificate. A certificate is a summary and cannot add coverage the policy lacks (New York Insurance Law section 502, for example, says so expressly); see certificate vs declarations page. Ask your broker for the declarations pages and the complete forms and endorsement schedule for each policy, then work column by column:

A requirement such as completed operations coverage for three years after the work is met only if each renewal keeps the endorsement for those years. Workers' compensation waivers are separate endorsements, often with a charge, and state rules vary.

Mark each cell met, partly met or not met. Partly met is common: the endorsement exists but covers ongoing work only, or the waiver is on general liability but not on auto. If you are new to these terms, see additional insured, waiver of subrogation and primary noncontributory, explained.

How do I sort and close the gaps?

Copy every partly met and not met cell into a gap list with four columns: the gap, the contracts affected, the fix, and who owns it.

Fixes usually come in four kinds, roughly from fastest to slowest: an endorsement, higher limits (often through the umbrella), a new line of coverage, or a negotiated change to the contract. A quote is not coverage; a requirement is met only once a carrier binds the policy or issues the endorsement. How to use each fix, and what an open gap can cost, is covered in when customer contracts require coverage you do not have. Questions about indemnity wording or enforceability belong with your attorney.

What does a finished review look like?

A hypothetical example. A buyer acquires a business-to-business services company with about 60 active customers. She ranks them by revenue and risk and picks twelve contracts plus the lease, covering roughly 80 percent of revenue. In two days her team builds the matrix. Comparing it with the policies shows three gaps: four contracts require completed operations additional insured coverage the policy does not include, three require a waiver of subrogation on workers' compensation that the policy grants only on general liability, and one requires professional liability with a retroactive date reaching back to the start of the relationship. Her broker asks the incumbent carriers for a completed operations endorsement and workers' compensation waivers in the states where the business works, and requests professional liability quotes. The professional liability customer agrees in writing to give the business 60 days to bind a policy. She presents the matrix and gap list at the next board meeting to show that the top contracts have been checked, each gap has a fix and an owner, and the endorsements and the new policy are waiting on carrier decisions. All figures are illustrative only.

How do I keep the matrix current?

The matrix is only useful if it stays current. Three habits keep it alive:

• Check before signing. Every new contract, renewal and amendment goes through an insurance check before signature, so you negotiate requirements instead of discovering them.
• Review at renewal. Before each policy renewal, give your broker the matrix so the renewing terms keep the endorsements and limits your contracts depend on.
• Track certificates. Certificates you send out should match the matrix and the policies; see set up certificate tracking in your first month.

To speed up the check before signing, Morrow's contract check can read a customer agreement's insurance requirements and compare them with your policies, flagging what looks missing. It is a starting point for a conversation with your broker and, where needed, your attorney; coverage changes depend on carrier underwriting.

Keep reading

• When Customer Contracts Require Coverage You Do Not Have
• Additional Insured, Waiver of Subrogation and Primary Noncontributory
• Lease Insurance Requirements Most New Owners Have Never Read
• Certificates the Seller Issued That Your Policy Does Not Back Up
• Set Up Certificate Tracking in Your First Month as Owner
• All guides for new business owners

Frequently asked questions

How many customer contracts do I need to review after buying a business?

Start with enough to cover most of your revenue and all of your higher-risk work, which is often a short list rather than every customer. Add your lease and loan agreement. Then check every new contract before signing.

Can I use the seller's certificates to see what coverage the contracts got?

Use them only as clues. A certificate summarizes coverage but cannot add it, and it may be out of date. Compare each requirement with the declarations pages and endorsements on your current policies.

How long does a contract review take?

For many small businesses, a first pass on the most important contracts takes a few days of focused work: a day or two to pull and extract the clauses, then a session with your broker to compare them with the policies. Fixing the gaps can take longer, because carriers decide on endorsements and new coverage.

Who should do the contract review, me or my broker?

Usually both. You know which contracts matter and can pull them; your broker can read the endorsements and request changes. Your attorney should handle questions about indemnity wording, assignment and enforceability.

What do I do if a customer requirement cannot be met?

Ask your broker whether another carrier can provide it. If not, negotiate the requirement with the customer and get any change in writing. Do not send a certificate that suggests coverage the policy does not provide.

References

• IRMI: Additional insured (definition)
• IRMI: Primary and noncontributory (definition)
• IRMI: Waiver of subrogation (definition)
• IRMI: Insured contract (definition)
• New York State Department of Financial Services: Certificates of Insurance

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.