The housing authority of a large municipality requirescontractors to name it as an additional insured on a primary and noncontributory basis…onthe workers' compensation and employers liability policy.

A state authority demands a commercial general liabilityendorsement prohibiting the insurance carrier from raising somelegal defenses without the authority's advance writtenpermission.

A general contractor requires subcontractors to carry $300,000in fire damage legal liability coverage. It also expectssubcontractors to have their insurance producers warrant that it isa “third-party beneficiary” under the policies.

These are real insurance requirements that agents and brokershave referred to me. The $300,000 fire damage coverage, though awaste of money, is theoretically available. However, it is unlikelythat a contractor could get its insurance companies to comply withthe other requirements.

Still, these types of provisions pop up in construction andlease contracts every day. Business owners sign the agreements andthen look to their agents and brokers to take care of the insurancerequirements. After the underwriter stops laughing, he refuses tocomply, the agent delivers this news to the client, and the clientthreatens to take his business elsewhere.

The agent is then in the happy position of choosing between twobad alternatives: Keeping the client happy by issuing a certificateof insurance that contains false information, or standing firm andwatching a valued client and associated commission revenue walk outthe door.

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At the very least, he will spend excessive amounts of time on anactivity that produces no additional revenue. All because ofunrealistic insurance requirements in contracts.

Every day I receive examples of insurance requirements that areincreasingly impracticable. Why is this happening? Here are severalreasons.

Ignorance. In some cases, the people makingthese demands do not understand insurance coverages. Fire damagelegal liability insurance covers only fire damage to premises theinsured is renting. A person who understands that does not care howhigh the limit of insurance is, unless that person is thelandlord.

Regulations. Some of these requirements areprovisions in state and municipal regulations, written by publicservants who have no expertise in insurance. See “ignorance,”above.

Risk Transfer. Some risk managers know(or should know) insurance coverage, but they want to shift as muchof their organizations' risks as possible to third parties.Consequently, they make insurance demands with little or noconsideration as to whether anyone can meet them.

Financial Clout. These entitiesapprove the bids, grant the licenses and permits, and hold thecheckbook. Therefore, they have the financial ability to pressurecontractors and tenants. This is true for tax-funded state andmunicipal entities, wealthy property owners, and generalcontractors. Because they have the money, they set the rules of thegame.

The solution to this problem is not complicated. Risk managers,attorneys who write the contracts, and representatives from theinsurance carrier and producer communities must work together toidentify:

• Insurance requirements that are desirable;
• Those that are actually possible to meet; and
• The best compromise between the two.

I don't think anyone in the insurance industry would deny thatorganizations have a right to demand that their vendors, tenants,and contractors purchase appropriate insurance. However, thecurrent situation—where each new contract contains insurancerequirements more outlandish than the one before—is inefficient anduntenable. Reasonable people can work this out for the benefit ofall; it's time that they did so.