Disclaimer: I am not an attorney and cannot give legal advice. This series is from a supply chain practitioner’s perspective on negotiating contracts and is simply offering my perspective on common contract clauses. Seek professional legal advice for your own contracts.
In our continuing series on contract clauses from a supply chain perspective, last week we talked about warranty and hazmat, and I told a little story about purple streetlights (have you seen any of those in your own neighborhood?). This week we talk about two clauses with a lot of substance and contention: training and insurance. Let’s dive in!
The example contract clauses and discussions of them below are separated by horizontal dividers to help you switch between them.
Training Clauses
16. TRAINING / TECHNICAL SUPPORT
16.1 Training. With each new or revised Product engineered by Seller, Seller will, at Seller’s expense, provide Buyer with an appropriate level of certified training for Buyer’s technical personnel. Seller also agrees to provide Buyer with an appropriate level of certified training for individuals performing Product repairs. The Product repair training is provided by Seller and is required for each Product for which the dealer is authorized to perform warranty repairs. In the course of any work or training performed on Buyer’s premises by Seller or its personnel, Seller will comply or cause its personnel to comply with all safety and security rules of Buyer and shall take all precautions required to prevent injury to persons or property during such work.
This training clause is unusual in contracts I have seen, and should be included in more. This is also one of the clauses that is truly in both the buyer and seller’s best interest. By contractually requiring training, the seller reduces warranty costs and the buyer gains additional technical product understanding. The last sentence about requiring precautions and safety rules while the seller is on the buyer’s site is common to find somewhere in the contract, but often has its own clause.
Many suppliers strike requirements that their personnel follow the buyer’s rules while on site, especially if there is a clause about required drug and alcohol testing programs. When suppliers strike those clauses because they “won’t have personnel at your sites,” I always ask if they intend to ever send a salesperson out to visit me or my technical team. Or in the case of this clause, how they will accomplish the required training. While there are a few rare cases where the supplier will never send a person on site to visit the buyer, it is always advisable to leave that option open. It is a matter of safety and respect for a seller’s representative to follow the buyer’s rules on buyer property, and I do not typically allow redlines to this clause. I have occasionally allowed it to be made mutual, where either party must obey the “home” party’s rules while on their property.
16.2 Technical Support. Seller agrees to provide technical support for new and existing Product(s) to Buyer’s customers, dealers, and employees. This includes but is not limited to technical documents, drawings, specifications, material specifications and other information as may be deemed necessary by Buyer.
16.3 Business Systems Seller agrees its business systems, defined herein as any system that Seller is using that relates to design, manufacture, sale or distribution of Product(s), including ERP, warehousing and sales of Products, are critical to maintaining continuity and continuous supply of Products to Buyer (hereinafter, “Business Systems”). Should Seller anticipate or plan to update, modify, convert, or in any way alter any of its Business System(s), Seller agrees to notify Buyer at least one-hundred eighty (180) calendar days prior to any anticipated change to Seller’s Business System. Seller agrees, to use its best efforts, to ensure there is no interruption to their supply of Products to Buyer. Seller shall also afford Buyer an opportunity to purchase a quantity of Products as safety stock at then current production pricing prior to Seller’s implementation of such change to its Business Systems.
The technical support clause (16.2) is fairly manufacturing-centric and can easily cause issues in negotiation without robust intellectual property (IP) and confidentiality clauses. The typical supplier redlines I see to this section involve adding references to that IP and confidentiality, and generally increasing its protections to include only those products that are strictly necessary. While this is a nice clause to have, it’s also difficult to enforce and has no “teeth” in it. What is the consequence if a supplier refuses to turn over drawings? Dissolving the contract? If they are trying to make a sale, wouldn’t they turn over this information regardless? Solid processes around gathering technical drawings and vetting products before purchasing can do more than this clause can. This is a clause I’m inclined to strike if requested by the supplier, allowing the redline in return for a concession elsewhere in the contract.
The last clause in the training section on business systems (16.3) echoes the “Potential Delivery Disruption” clause earlier in the contract. This is part of the “redundancy philosophy” of this contract, where a supplier might have to redline a certain principle everywhere it appears in the contract to fully remove it. By spelling out the need for warning in changing a business system in more detail here, it is more likely to make it into a final contract. I also sometimes add a clause about not charging the buyer for any changes to the seller’s business systems. It seems strange, but I have seen suppliers try to spread costs–such as adding in their “library” of suppliers and customers to a new system–to their many customers and suppliers as a cost of doing business. Changing ERP systems is expensive and often required, but has to stay a cost of the company changing systems only.
Insurance Clauses
17. INSURANCE
17.1 Insurance Coverage. Seller shall carry and maintain the following insurance coverage during the term of this Agreement and for five (5) years thereafter: (i) Workers’ Compensation and Employer’s Liability Insurance with statutory coverage for Workers’ Compensation, and a one million dollars ($1,000,000) per occurrence limit for Employer’s Liability, (ii) Commercial General Liability insurance, using an ISO(Insurance Services Office) (or equivalent) policy form including full Contractual Liability coverage as per the form with a per occurrence limit of not less than three million dollars ($3,000,000) and five million dollars ($5,000,000) in the aggregate for personal injury, death, property damage, bodily injury, contractual liability, independent contractors, broad-form property damage, and Products and completed operations coverage; and (iii) Commercial Automobile Liability Insurance with a combined single limit of not less than one million dollars ($1,000,000) per occurrence for bodily injury, death and property damage for hired, owned and non-owned vehicles.
Insurance clauses are complicated and sticky. The insurance clauses are one of the clauses I touch as minimally as possible, deferring to an insurance or risk department if my company has one. It is extremely common for a supplier to send this section of the contract template directly to their insurance company for redline, at which point the insurance company tears into it. This is one of the most redlined sections I see, both because it is turned over to a litigation-minded insurance company to redline and because there are many existing contracts and costs in place with regards to insurance. So I will break down some of these insurance requirements to the best of my ability, but please remember I am a procurement/supply chain person and not an insurance person. I’ve simply seen many of these. If you are an expert in this space and feel like weighing in or constructively correcting any errors you see, please feel free!
- Worker’s compensation and Employer’s Liability Insurance – this insurance covers if a supplier’s employee is injured on the job, and covers those costs and/or associated liability. This is relevant to a buyer because the costs of an injured worker (especially in the case of a lawsuit) can be steep. Paying these costs out of pocket can destabilize the supplier and cause them to go bankrupt, meaning they can no longer supply products. As of writing this article, I typically see coverage of $1m or its equivalent for this insurance.
- Commercial General Liability Insurance – this coverage is for if the supplier causes harm to someone outside their business. The risk is much lower for suppliers who provide non-physical services (such as software) than those who provide products or physical services (such as construction), but is commonly required for both. This coverage typically falls between $1m and $5m depending on the seller’s industry and product, and I have seen redlines accepted to the amount of required coverage based on those differences.
- Commercial Automobile Liability Insurance – this is similar coverage to what individuals use for their own vehicles and insures against vehicle accidents. Similar to with worker’s compensation, the intent is to guard against supplier bankruptcy and ensure continued supplier viability as an independent business. This insurance is required in the contract instead of simply falling under the compliance with laws clause because it is not required in every US state or every country. The amounts for this requirement vary widely and are sometimes further broken up by bodily injury coverage and comprehensive coverages, but are typically between $1m and $3m.
- Cyber Insurance is not included in this contract template, but continues to grow more common. This is insurance intended to protect both the supplier and buyer in the event of a cybersecurity breach and the associated costs. Cyber insurance is tricky because it is expensive, often hard to trace the responsible party (was it the supplier who opened the email or one of their suppliers who started the breach?), and it is difficult to persecute the true cyber criminals. Part of the expense of cyber insurance is that it typically starts with requiring $5m in coverage and goes up from there. If you decide to make cyber insurance part of your requirements, realize the supplier is likely to pass on this additional coverage cost.
17.2 Policy Requirements. All policies shall be underwritten by insurance companies with an A- or better rating as designated by A.M. Best. Each policy shall provide that (a) Buyer and its subsidiaries and affiliates be named as additional insured (other than for Workers’ Compensation); (b) not less than thirty (30) calendar days prior written notice shall be given to Buyer in the event of any alteration, cancellation, or termination of such policy; (c) the Commercial General Liability coverage will be primary insurance with respect to coverage maintained by Seller and its subsidiaries and affiliates; and (d) all insurance will include a Waiver of Subrogation in favor of Buyer. Seller shall provide Buyer with a certificate of insurance evidencing such coverage upon the Effective Date of this Agreement and at least thirty (30) calendar days prior to each renewal period of this Agreement and/or such insurance policy. The minimum insurance requirements provided in this Section shall not, in any way, limit Seller’s obligations to Buyer under this Agreement.
This last insurance clause simply requires the insurance company to be reputable and stable in their own right. It also outlines that the buyer needs to be included in the supplier’s insurance coverages and receive notice in the event of an insurance coverage change.
Side Note: I have strong feelings about Certificates of Insurance. It is very common for companies to collect Certificates of Insurance (COIs) from their suppliers annually, and to manage and file these massive piles of paperwork. Procurement teams spend inordinate amounts of time chasing down COIs and scanning them in or interoffice mailing them to an insurance department, or a company spends a lot of money to a 3rd party supplier to manage their COIs and do that chasing. Usually this is driven by the buyer’s insurance company requiring this extremely high level of “policing” supplier insurance. HOWEVER, a COI is only valid on the day it is issued. That’s it. Especially without a contractual obligation to give notice of changes, a supplier can theoretically call up their insurance company the day after issuing their COIs to customers and turn their coverages to the minimum if they so desire. While this would be in bad taste at best, it is possible. Therefore, I am an advocate for procurement departments not wasting their time chasing COIs. It’s bureaucracy at its finest, and is a complete illusion of risk aversion. If you can get your company to not require the COI chasing, do so. Failing that, the 3rd party supplier responsibility for chasing COIs is the next best option. That wraps up this week’s deep dive into contracts. Next week we will talk about some very “legalese” clauses: Indemnification, recall and termination. If you’d like to talk to me about your company’s contract clauses, let’s chat.