Why supplier liability is insured
A public procurement contract sets out the deadlines, scope, quality and acceptance procedure for goods, works or services. A breach of obligations can lead to claims from the customer, additional costs and disputes. Insurance makes it possible to determine in advance which part of the risks the insurer takes on.
The policy does not release the supplier from performing the contract and does not guarantee payment of every claim. An event is treated as insured only if it complies with the terms of the insurance contract and does not fall under the exclusions.
Who needs it and when
Supplier liability insurance is considered by companies and sole proprietors that take part in public procurement of goods, works and services: suppliers of equipment and materials, construction and repair contractors, service organizations, and providers of maintenance services for buildings, vehicles and information systems. The question is especially relevant for long-term contracts with staged acceptance, where a mistake at one stage can lead to claims under the entire contract.
It is worth thinking about a policy while the bid is still being prepared. If the documentation allows insurance, its terms are better agreed in advance rather than on the last day before the contract is signed: the insurer needs time to analyze the procurement and the draft contract.
Which risks may be considered
- non-performance of obligations under the contract;
- inadequate quality of the result;
- breach of the agreed deadlines, if it is included in the cover;
- an obligation to compensate documented damage;
- agreed costs of handling a claim.
The following are usually excluded: intentional breaches, circumstances known in advance, fines and penalties outside the cover, changes to the procurement terms made without notifying the insurer, false information, and events outside the policy period.
How insurance differs from performance security
Procurement uses different instruments: a guarantee deposit, a bank guarantee, and security for contract performance. Liability insurance works differently: the insurer compensates losses within the limit and only for events that the contract classifies as insured events. A bank guarantee, as a rule, is paid on the beneficiary's demand if the formal conditions are met. Therefore, one instrument cannot be replaced with another without direct permission in the documentation.
If the contract provides for an advance payment, insurance related to the return of the advance can be considered separately: a preliminary calculation is available in the calculator.
Documents for the calculation
- the procurement documentation and the draft contract;
- information about the supplier and its experience in performing contracts;
- the technical specification;
- the price, deadlines and performance schedule;
- information about subcontractors;
- financial statements and claims history.
How to choose the insurance terms
- match the subject of insurance to the obligations under the procurement;
- check the beneficiary;
- agree the limit and the period of cover;
- take into account the acceptance stages and the warranty period;
- study the exclusions, the deductible and the notification procedure;
- report changes to the main contract to the insurer in writing.
What to look at in the insurance contract
- sum insured and limits — the overall limit and, where applicable, limits per event or for separate types of costs;
- deductible — the part of the loss that the supplier bears itself;
- period of validity — must cover the contract performance period and, where provided for, the warranty period;
- beneficiary — who exactly receives the compensation;
- exclusions — fines, penalties, indirect losses, lost profit, intent;
- policyholder's obligations — notification deadlines, agreeing a settlement, providing documents;
- subrogation — the insurer's right, after paying, to bring a claim against the person responsible for the loss.
The general principles of liability insurance are described in the liability insurance section.
What to do if the customer makes a claim
Notify the insurance company within the prescribed period and submit the claim, the procurement contract, acceptance certificates, correspondence, the damage calculation and documents on performance. Do not admit the claim without prior agreement if the policy so provides.
Typical supplier mistakes
- taking out a policy from a template without checking it against the specific procurement contract;
- a mismatch in the subject, deadlines or amount of the contract between the policy and the contract;
- failing to notify the insurer of a change to the contract, an extension of deadlines or a change of subcontractor;
- admitting the customer's claim without agreement with the insurance company;
- missing the deadline for notifying a claim;
- expecting the policy to cover any fines and penalties.
Frequently asked questions
Does the policy replace security for contract performance?
Not always. It depends on the requirements of the procurement and on the legislation. The type of security must be expressly permitted by the documentation.
Does the insurance cover fines?
Only if the relevant risk is expressly included and is not prohibited by the terms. A standard policy often contains restrictions on fines and penalties.
Can a policy be taken out after the procurement contract has been signed?
This is possible if the insurer is willing to accept the risk, but events and claims that the supplier knew about before the policy was issued are usually excluded. The earlier the policy is issued, the fewer disputed issues there are.
Who chooses the insurance company?
As a rule, the supplier chooses the insurer independently, unless the procurement documentation sets additional requirements. A list of insurers is given in the insurance companies section.
Practical tip
Before applying for insurance, draw up a table of obligations under the procurement contract: stage, deadline, responsible person, supporting document and the possible amount of a claim. Such control helps to describe the risk to the insurer more accurately and reduces the likelihood of missing a material condition.
If you need to compare the policy terms with the documentation of a specific procurement, you can get a consultation from a broker.
This material is for information purposes only. Before taking out a policy, the current procurement requirements must be checked.