Insurance vs. indemnification: how risk transfer actually works

The two-part system

Commercial risk transfer rests on two contracts working together:

1. The vendor agreement— between you and the vendor — includes an indemnification clause where the vendor (the indemnitor) agrees to defend, indemnify, and hold harmless your firm (the indemnitee) for losses arising from the vendor's work.
2. The vendor's insurance policy — between the vendor and their carrier — includes endorsements (additional insured, primary and non-contributory, waiver of subrogation) that direct the carrier to defend and pay you when the indemnification triggers.

Both contracts have to exist for the system to work. The indemnification clause is what creates the obligation. The insurance is what makes it collectible.

How each one fails alone

Indemnification without insurance

The vendor signs the contract. The indemnification clause is rock-solid. A claim hits. The vendor goes to pay — and they can't. They're a small firm, the claim is large, and the contract obligation is more than their net worth. You sue them, win, and get a judgment they can't satisfy. Or they file for bankruptcy. Either way, the indemnification was a promise without backing.

Insurance without contractual indemnification

The vendor has a great policy. Limits are high. Endorsements are excellent. But your contract doesn't actually require the vendor to defend or indemnify you for these claims. The vendor's carrier will pay the vendor'sclaims, not yours. You're tendering a defense that you have no contractual right to.

The right COI in this picture

For the system to deliver real protection, your contract's indemnification clause should be backed by specific insurance requirements that you verify on every vendor's COI:

• Additional insuredon GL (CG 20 10 ongoing + CG 20 37 completed) — gives you direct rights against the vendor's policy without having to first go through the vendor.
• Primary and non-contributory (CG 20 01) — makes the vendor's policy answer first, so your own policy doesn't end up paying via contribution.
• Waiver of subrogation (CG 24 04 + WC 00 03 13) — stops the vendor's insurer from coming after you to recover what they paid.
• Limits high enough to cover the indemnification obligation. (A vendor promising $5M of indemnity with $1M of insurance has a $4M gap.)

The common drafting failure

A surprising number of subcontract templates require "adequate insurance" without specifying limits or endorsements. That's a drafting failure. The phrase is unenforceable in most jurisdictions, and even where it's enforceable it doesn't solve the problem of checking whether the insurance actually meets the indemnification.

A defensible subcontract template specifies:

• The form of indemnification (broad / intermediate / limited).
• Specific dollar limits per coverage line (GL, Auto, WC, Umbrella).
• Specific required endorsements with form numbers.
• The verification mechanism — typically "Vendor shall provide a Certificate of Insurance evidencing the above."
• The time of compliance — "before commencing any work."

Frequently asked questions