"Whose Insurance Is It Anyway?”
The Hidden Battle of Primary Coverage in Service Provider Contracts
When it comes to contracts, there are the terms you expect (like deliverables, timelines, and payment, etc.), and then there’s insurance—often overlooked and misunderstood—which can unknowingly and wildly shift risk from one party to another, creating unbalanced and often inequitable results . . . for both parties.
One recurring, often missed (or misunderstood) issue?
“Should the service provider’s insurance be primary, even if the client is at fault?”
Common language you are likely to see in many contracts these days require the service provider to name the client as an additional insured, ensure the provider’s insurance is primary and non-contributory, and waive subrogation rights—even where the claim arises from the client’s own negligence or breach.
Let's unpack the pros, cons, equity, and real-world negotiating strategies you should be aware of when dealing with these insurance provisions.
⚖️ The Client’s View: More Protection, Less Risk, Easier Administration, Less Dispute Resolution
From a client’s perspective, requiring the provider’s insurance to pay first—even for client-caused issues—feels like a great deal. After all:
It simplifies claims handling.
It reduces disputes between insurers.
It avoids the question: Who pays for this?”
The theory is that if the service provider’s insurance covers the risk—even tangentially—it should kick in first and fully as they are providing the service. For clients, this can seem like good business. For providers? Not so much. But is it really the right result for either party?
😬 The Service Provider’s View: “Primary” Feels Punitive and Turns the Service Provider into an Insurance Company
This approach might look harmless (or at least common) on paper, but it can bite the service provider in the balance sheet and have significant unintended consequences.
So, What are the Major Concerns?
Paying for Someone Else’s Mistake: The provider's insurance responds even if the client was the one who caused the damage (think: the client unintentionally installed software that shut down all your customers for 48 hours, but your insurance pays). Why should this be the case if the service provider was not at fault?
Insurance Erosion: Every claim paid under the policy reduces available coverage for other work, other injury, or other client claims, potentially leaving the service provider exposed in the case of other or later claims.
Rising Premiums: Insurers don’t like to pay claims, particularly if based on a mistake. They notice, and they price accordingly. After your insurance pays a claim, fully expect your premiums to increase upon renewal.
Insurance Availability / Unable to Underwrite Coverage: In some cases, smaller providers may find that their policies can’t be tailored to meet such extreme requirements, and insurance carriers may not be able to fully underwrite a risk they cannot reasonably calculate (the risk of negligence by a third-party) — so coverage may no longer be offered, or only provided at a prohibitively expensive cost.
💼 Market Practices: Common, but Contextual
Despite these challenges, such insurance provisions appear often in contracts, particularly in technology, construction, logistics, and energy verticals, including in enterprise SaaS, IT services, or managed infrastructure contracts, and you can bet they will appear in AI contracts where risk transfer is taking front and center.
Typical patterns include:
Primary and non-contributory clauses for general liability, E&O and cyber liability policies.
Waivers of subrogation (i.e, the paying insurance company is not able to get reimbursed from the other party’s insurance carrier, even if the other party was at fault), especially when there’s co-development, on-premises work, or third-party integration risks, although these provisions are becoming more and more common for plain ol’ SaaS and platform services.
Still Some Pushback on “full-blame” transfers: It’s still considered unreasonable in many cases (although becoming more common) to require a provider to insure against claims solely arising from the client’s (other party’s) own negligence, particularly in multi-party environments (e.g., cloud ecosystems, systems integrators).
🏛️ Government Contracting: Even Trickier
When contracting with government entities, insurance provisions often become even more one-sided.
Governments often are prohibited from indemnifying private parties, so they demand maximum risk transfer to the provider instead.
Providers are frequently required to make their insurance primary, non-contributory, and include waivers of subrogation—with no reciprocal promises.
Negotiation is limited, but you can sometimes scope the provisions more narrowly or include carve-outs for government fault.
👩⚖️Principles of Fairness and Equity – Is the Shift in Responsibility Actually Beneficial?
· Fundamentally, requiring a service provider to cover the client’s own negligence through its insurance challenges basic principles of fairness and insurability. Insurance is priced based on assumed risk; shifting responsibility to the service provider, even for the client’s actions, upends the actuarial basis for that pricing and creates a hidden cost subsidy in favor of the client, not clearly determinable during the underwriting process. This can result in much higher premiums, or limited or even no coverage.
· Additionally, this approach may violate public policy (or applicable law) in some jurisdictions if it amounts to effectively indemnifying a party for its own [gross] negligence or willful misconduct, which is prohibited in certain jurisdictions.
🧭 Best Practices and Recommendations
Here’s some recommended practices for how to deal with these sticky insurance questions (an remain solvent in the process):
✅ Do:
Limit Primary Insurance to claims “arising from” or “caused by” the provider’s work or negligence.
Request Mutuality: Request mutual waivers of subrogation and reciprocity in indemnity and insurance terms when being asked to provide these terms.
Ensure Alignment with Insurance Carriers: Don’t sign what your broker (or policy) can’t back up, and engage with your broker early during negotiations to ensure your insurance program can accommodate the contract requirement without endangering future insurability.
Negotiate in Context: Explain how unreasonable terms can affect cost, coverage, and your (and ultimately your client’s) ability to do business competitively.
❌ Don’t:
Accept blanket clauses requiring your insurance to pay even if the client is solely at fault.
Ignore the insurance implications of these clauses during contract review—what seems like boilerplate can become costly. Engage your broker or risk manager.
Assume “everyone agrees to this” without checking current norms in your industry and pushing back where reasonable.
🧩 Sample Compromise Language
Here’s one way to thread the needle:
“Service Provider’s insurance shall be primary and non-contributory with respect to claims to the extent caused by Service Provider’s negligent acts or omissions in connection with the services or material breach of this Agreement. Service Provider’s insurance coverage and the related conditions set forth in this clause shall not apply to claims solely arising from Client’s negligent acts or omissions or breach of this Agreement.”
Bonus clause (for subrogation waivers):
“Each party waives rights of subrogation, but only to the extent such waiver does not void or impair insurance coverage.”
📚 Take Aways
A contract shouldn’t be a sneaky way to turn a service provider into an insurer. Requiring a service provider’s insurance to be primary—even when the client is at fault—can significantly distort risk allocation. While market norms support additional insured status and primary coverage for provider-caused loss, pushing the boundaries to cover client negligence or breaches risks destabilizing provider insurance availability and affordability.
Equitable contracting means aligning risk with responsibility. Service providers should resist overly broad insurance requirements, and clients should be mindful of the downstream impacts such demands have on vendor viability, insurance markets, and long-term costs.
Fairness in risk allocation isn’t just good ethics—it’s good business. Because at the end of the day, if your vendor has to pay for your mistake, their costs go up… and so do yours.
Excellent post.
I love the practical advice, with suggested compromise positions. Great post! Thanks.