Required coverage: Overview, definition, and example
What is required coverage?
Required coverage refers to the minimum level of insurance or financial protection that a business, individual, or contractor must maintain under a contract, regulation, or law. This coverage ensures that potential risks—such as property damage, liability claims, or financial losses—are properly insured to protect all parties involved.
Common types of required coverage include general liability insurance, workers' compensation, professional indemnity insurance, and property insurance. The specific requirements depend on the industry, contract terms, and applicable legal regulations.
Why is required coverage important?
Requiring insurance coverage in contracts helps reduce financial risk and liability. If one party causes damage or loss, having adequate coverage ensures that compensation is available, preventing costly disputes or out-of-pocket expenses.
For example, a landlord may require a tenant to carry renter’s insurance, or a business may require its contractors to maintain liability insurance to cover potential accidents or damages. Without required coverage, parties could be exposed to significant financial risks in case of an incident.
Understanding required coverage through an example
Imagine a construction company hires a subcontractor to complete electrical work on a new building. The contract requires the subcontractor to carry at least $1 million in general liability insurance.
If the subcontractor accidentally causes a fire that damages the building, the required insurance coverage ensures that the costs are covered, rather than leaving the construction company or the property owner responsible for the damages. Without this requirement, the financial burden could lead to legal disputes and delays in the project.
An example of a required coverage clause
Here’s an example of how required coverage might be written in a contract:
“The Contractor shall maintain, at its own expense, the following insurance coverage for the duration of this Agreement: (i) General Liability Insurance with a minimum coverage amount of $1,000,000 per occurrence; (ii) Workers' Compensation Insurance as required by applicable law; and (iii) Professional Liability Insurance with a minimum coverage of $500,000. The Contractor shall provide proof of coverage upon request and shall notify the Company of any changes to the policy.”
Conclusion
Required coverage helps protect businesses, individuals, and third parties from unexpected financial risks. Clearly defining insurance requirements in contracts ensures that all parties are prepared for potential liabilities, reducing disputes and financial losses.
Before entering into an agreement, always review and confirm required coverage terms—because having the right insurance in place can prevent costly problems down the road.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.