In practice, clearly and comprehensively stipulating insurance clauses not only enables the parties to reasonably allocate risks during contract performance, but also helps minimize disputes and safeguard their interests in the cases of unforeseen incidents. However, if such clauses are drafted in a cursory or inconsistent manner, they may become “legal loopholes” detrimental to the enterprise. The following article analyzes essential considerations when formulating insurance clauses in commercial contracts, thereby providing a useful reference for parties to draft them effectively and in compliance with applicable laws.
In practice, clearly and comprehensively stipulating insurance clauses not only enables the parties to reasonably allocate risks during contract performance, but also helps minimize disputes and safeguard their interests in the cases of unforeseen incidents. However, if such clauses are drafted in a cursory or inconsistent manner, they may become “legal loopholes” detrimental to the enterprise. The following article analyzes essential considerations when formulating insurance clauses in commercial contracts, thereby providing a useful reference for parties to draft them effectively and in compliance with applicable laws.
I. Importance of insurance clauses in commercial contracts
Insurance clauses in commercial contracts play a particularly significant role as they serve as a legal mechanism for risk allocation, protection of the parties’ interests, and maintenance of contractual stability. Specifically:
- Risk-sharing and allocation mechanism: In business activities, risks such as fire, natural disasters, occupational accidents, loss or damage of goods, or liability to third parties cannot be completely eliminated. Insurance clauses help determine which party is responsible for procuring insurance, the type of insurance to be applied, and the scope of insured risks. As a result, when an insured event occurs, the loss is not borne entirely by one party but is shared with the insurer.
- A tool to protect the lawful rights and interests of the parties: Clearly stipulating insurance provisions in a contract gives the parties confidence in performing their obligations and provides a legal basis for claiming indemnification from the insurer when losses arise. For example, in a goods transportation contract, if the carrier has obtained liability insurance, the service user may be compensated for the value of damaged or lost goods without having to pursue prolonged litigation.
- Enhancement of transparency and limitation of disputes: A well-drafted insurance clause will specify the type of insurance, premium, entitlement to claim indemnity, and obligations to provide information. It helps prevent disputes when an insured event occurs. Conversely, vague or incomplete provisions may lead to disagreements regarding the obligation to obtain insurance or entitlement to insurance proceeds.
II. Legal regulations governing insurance clauses in commercial contracts
1. What is an insurance clause in a commercial contract?
Pursuant to Clause 16, Article 4 of the Law on Insurance Business 2022, an insurance contract is an agreement between the buyer and the insurer, a branch of a foreign non-life insurer, or a mutual organization providing microinsurance, whereby the buyer is obliged to pay insurance premiums, and the insurer or relevant entity is obliged to pay indemnity or insurance proceeds in accordance with the agreement.
An insurance clause in a commercial contract is understood as an agreement between the parties regarding the procurement, maintenance, and performance of insurance-related obligations in order to prevent and allocate risks that may arise during contract performance.
In essence, it is a risk allocation clause under which one or both parties undertake to procure insurance for assets, persons, civil liability, or related interests, thereby transferring risks to the insurer.
2. In which types of contracts are insurance clauses commonly applied?
Insurance clauses are not mandatory in all commercial contracts; however, in practice and under sector-specific laws, they commonly appear in:
- Contracts for transportation of goods or passengers: The carrier is required to obtain civil liability insurance in accordance with transport regulations.
- Construction contracts: Contractors are typically required to obtain insurance for on-site workers and for construction works during the construction period.
- Lease agreements and logistics service contracts: Service providers may be required to obtain insurance for stored or transported goods.
- Contracts in high-risk sectors: Such as compulsory fire and explosion insurance, professional liability insurance for lawyers and notaries, health insurance, and social insurance for employees.
Accordingly, the scope of application of insurance clauses is broad, being mandatory in certain sectors while remaining voluntary in others where parties wish to enhance legal security.
3. What contents are typically included in insurance clauses in commercial contracts?
To ensure clarity and enforceability, insurance clauses in commercial contracts generally include the following main elements pursuant to Article 17 of the Law on Insurance Business 2022:
- Information on the buyer, the insured, the beneficiary (if any), and the insurer or branch of a foreign non-life insurer;
- Subject matter of insurance;
- Sum insured, value of insured property, or insurance liability limits;
- Scope of coverage or insurance benefits; insurance rules, terms, and conditions;
- Rights and obligations of the insurer, the branch of a foreign non-life insurer, and the buyer;
- Insurance period and effective date of the insurance contract;
- Insurance premium and method of payment;
- Method of indemnification or payment of insurance proceeds;
- Dispute resolution mechanism.
III. Questions regarding insurance clauses in commercial contracts
1. Can insurance clauses in commercial contracts be drafted based on templates?
The law does not mandate the use of standardized templates for insurance clauses. However, in practice, many industries (such as transport, logistics, and construction) adopt standardized insurance provisions for ease of application.
Parties may refer to templates provided by industry associations, insurers, or consulting organizations, but such templates must be amended to suit the specific transaction and comply with current legal regulations.
2. Is it a violation of law if a commercial contract does not include an insurance clause?
In principle, if the business sector does not fall within the category requiring compulsory insurance, the absence of an insurance clause does not constitute a legal violation. However, it may expose the parties to significant risks in the event of loss.
Conversely, in sectors where compulsory insurance is required under Clause 2, Article 8 of the Law on Insurance Business 2022, failure to agree upon or procure insurance constitutes a violation.
3. In which cases are insurance clauses mandatory in commercial contracts?
Pursuant to Clause 2, Article 8 of the Law on Insurance Business 2022:
- Compulsory insurance is designed to protect public interests, the environment, and social safety.
- Types of compulsory insurance include: Compulsory civil liability insurance of motor vehicle owners; compulsory fire and explosion insurance; compulsory insurance in construction investment activities; and other compulsory insurance as prescribed by relevant laws.
- Organizations and individuals subject to compulsory insurance are obliged to procure such insurance and may choose insurers or branches of foreign non-life insurers authorized to provide such products.
In these cases, insurance clauses become mandatory components of commercial contracts, and their absence may lead to legal risks.
4. How is a breach of an insurance clause in a commercial contract handled?
Where a party fails to procure or maintain insurance as agreed, such conduct constitutes a breach of contract.
Legal consequences (Articles 419 and 428 of the Civil Code 2015):
- The breaching party must compensate for damages arising from the failure to fulfill the insurance obligation.
- The injured party has the right to unilaterally terminate the contract or request intervention from a court or commercial arbitration.
For example, in an international transportation contract, if the carrier undertakes to procure cargo insurance but fails to do so, it must fully compensate the value of the goods in case of loss.
5. Is an insurance clause considered a mandatory clause in commercial contracts?
Insurance clauses are not mandatory in all commercial contracts, but only in specific types of contracts or sectors as prescribed by specialized laws.
Nevertheless, given their role in risk allocation and protection of interests, such clauses are strongly recommended to be included in contracts to prevent disputes and ensure legal certainty.
IV. Legal advisory services related to insurance clauses in commercial contracts
To assist enterprises and individuals in safely drafting and performing commercial contracts, legal advisory services may provide support in the following areas:
- Analyzing legal regulations related to insurance applicable to each type of contract;
- Assisting in drafting appropriate insurance clauses to avoid inconsistencies or omissions;
- Advising on the selection of suitable insurance products in line with business needs and legal requirements;
- Representing clients in dealings with insurers when insured events occur and in claiming indemnification;
- Resolving disputes relating to insurance obligations in commercial contracts before courts or commercial arbitration.
It can be seen that properly drafting and implementing insurance clauses is not only a risk management measure but also a demonstration of professionalism and legal compliance in commercial activities.
Should you have any further inquiries regarding insurance clauses in commercial contracts or other legal matters, please contact NPLaw for direct consultation and guidance from our team.
