Contract with contractor: ask for the insurance!

As a client, do you want to be certain that you can recover damages? Then do not merely require the contractor to have business liability insurance, but have them provide a copy of the policy before signing. An insurance obligation in your contract is worthless if the policy does not cover the work or if the contractor goes bankrupt. By checking the coverage in advance and firmly establishing the insurance obligation in the agreement, you prevent being left empty-handed in the event of serious damage.

What is an insurance obligation in a contract?

An insurance obligation is a provision in your agreement in which you stipulate that the contractor must take out and maintain valid (business) liability insurance for the duration of the assignment. The goal is simple: to ensure that there is something to recover in the event of damage, even if the contractor is unable to pay themselves.

As a client, you want the work to proceed properly and safely. You rely on quality and therefore often stipulate a result obligation : the contractor must deliver an agreed-upon result, not just do their best. You prefer to avoid exoneration clauses (clauses that exclude or limit liability), so that you can simply hold the contractor accountable in the event of damage.

However, the right to hold someone liable is of little value if there is nothing to recover. Therefore, in practice, it is at least as important to contractually oblige the contractor to take out and maintain valid business liability insurance.

Why an insurance obligation is crucial: the bankrupt contractor

Damage can mount up considerably. Consider faulty electrical wiring that causes a fire in your business premises. You hold the contractor liable, but if this leads to their bankruptcy, you are often unable to recover your damages, or can only recover them with great difficulty. In a bankruptcy, as an ordinary (unsecured) creditor, you are usually at the back of the queue.

It is therefore much more interesting to approach the business liability insurer directly — provided the contractor has such insurance. And that is by no means always the case. Business liability insurance is not legally mandatory for many entrepreneurs and the premiums can be substantial, causing some companies to choose to operate uninsured.

Therefore, always stipulate in the agreement that the contractor must have business liability insurance. Attach an obligation to provide proof thereof within a certain period. If the contractor fails to do so, clearly state that you may terminate the contract.

First a copy of the policy, only then an agreement

Although clients are increasingly requiring business liability insurance, things frequently go wrong in practice. This was also demonstrated by a ruling of the District Court of The Hague on August 15, 2018 (ECLI:NL:RBDHA:2018:9668). In that case, the contractor *did* have business liability insurance, but the insurer refused coverage retroactively: the work performed did not fall under the policy and the warranty provisions had not been met.

The client could not recover the damages from the contractor because the latter was bankrupt, and subsequently tried to sue the insurance intermediary of the bankrupt company — also without success.

The lesson is clear: the mere existence of insurance says nothing about the coverage. Therefore, do not merely require the contractor to be insured, but have him submit the policy (conditions) before signing. You can even include the submission of a valid policy as a suspensive condition for the formation of the agreement, so that a contract only exists once the coverage is demonstrably in order.

What to look out for in the policy

Will you receive a copy of the policy? If so, be sure to check the following points before you sign.

• Coverage description: do the specific activities of this assignment fall under the policy?
• Insured amounts: is the maximum insured amount sufficient for the potential damage?
• Exclusions and warranty provisions: are there conditions the contractor must meet to retain coverage?
• Validity and duration: is the insurance still active and does it remain in effect for the entire assignment?
• Deductible: how high is it and who bears it?

Are you unsure whether a policy provides the correct coverage for your assignment? Then have the provisions in your contract for services legally reviewed in advance, so that the insurance obligation aligns with the work you are having performed.

Pay attention to exemption clauses in someone else's contract

Does the contractor propose an agreement themselves? If so, always have it reviewed thoroughly. Any exemption clauses could mean that you can no longer hold not only the contractor liable, but through them, their insurer as well. That is a real risk you do not want to overlook. You never have to accept a presented contract without question; a counter-proposal is always possible.

Concrete next steps for clients

1. Include an obligation in the agreement to have and maintain business liability insurance.
2. Request a copy of the policy and the policy conditions before signing.
3. Check whether the coverage matches the activities and the risk of damage.
4. If necessary, make the submission of a valid policy a condition for concluding the agreement.
5. Stipulate that you may terminate the contract if the contractor fails to provide valid proof of insurance.
6. Have a contract provided by the contractor reviewed for exemption and liability clauses.

Frequently Asked Questions

Is business liability insurance legally required?

For most entrepreneurs, business liability insurance is not legally mandatory. However, insurance obligations or industry regulations may apply to specific professions or sectors. Since a contractor may therefore be uninsured, it is advisable to include the insurance obligation in your contract yourself.

What is the difference between an obligation of effort and an obligation of result?

With a best-efforts obligation, the contractor must make a proper effort, but a specific result is not guaranteed. With a results obligation, he must deliver a concrete, agreed-upon result. A results obligation gives you, as the client, a stronger position if the result is not achieved.

Can I contact my contractor's insurer directly?

That depends on the situation and the policy. In certain cases, the law offers an injured party the option to sue the liability insurer directly, but this is not unlimited and the policy conditions are decisive. Seek proper advice on this matter before assuming that you can turn to the insurer.

What do I do if the contractor refuses to provide a policy?

In that case, do not settle for a verbal promise. Stipulate in the contract that providing a valid policy is a condition and that you may terminate the agreement in the absence thereof. If the contractor is unwilling to cooperate, that in itself is a warning sign.

Does an exemption clause always help the contractor?

Not always. Under certain circumstances, an exemption clause may be unreasonably burdensome or contrary to reasonableness and fairness, and therefore cannot be applied. Whether reliance on such a clause holds up depends heavily on the circumstances. Prior legal review prevents surprises afterwards.

How do I properly stipulate an insurance obligation in my contract?

Specify concretely which insurance is required, what minimum insured amount applies, that the contractor provides a copy of the policy before commencement, and that he maintains the insurance for the entire duration of the assignment. Attach a right of termination in the event that he fails to comply with these requirements. A legal expert can draft such a provision tailored to your assignment.

Have your contracts made legally watertight

At MKB Juristen, we understand the risks associated with agreements. We review submitted contracts, point out hidden dangers such as missing insurance obligations or risky exemption clauses, and draft a counter-proposal where necessary. View our expertise in contract law or explore the options for direct legal assistance with contractual matters.

Do you want to know where your contract is holding up? Schedule a no-obligation intake consultation and ensure you aren't left empty-handed in the event of damage.