In most contracts a buyer will require a supplier to carry insurance policies to cover specific perils where the buyer could sustain certain losses or be sued by third parties. For example if a third party is injured by the negligence of a supplier or contractor, the third party could sue the buyer under the theory of agency where the buyer as the principal is liable for the acts of their agent (the supplier). In addition to having insurance cover the specified perils and be at least the specified limits, you may also want to be
listed on the insurance policy as an additional insured or named additional insured.
When I did construction contracting for an owner we always required that we be named as an additional insured on the contractor’s insurance. There was a number of reasons for that.
First, if the contractor was fraudulent in their application for insurance, the insurance company could cancel their insurance and not cover a loss, but they couldn't cancel the additional insured.
Second, as an additional insured you get provided with notices of any changes to the policy such as reductions in limits or cancellations of policies.
Third, many times companies do not have significant assets to cover the size of major loss covered by insurance or could have financial problems. You don't want the proceeds to be paid to the contractor on your loss as you may never recover the money from them or may have to go through the collection or litigation process.
When you are named as an additional insured when there is a loss that is applicable to you that is covered by the their insurance, the Insurance company will either make payment directly to you or they will write a dual party payee check that Contractor cannot cash on their own.
Do you need to be named as an addition insured? If the buyer does their homework in qualifying the supplier, they should know whether the supplier has sufficient assets on their own to cover the loss. If they don’t or they have marginal financials status it is probably best to also be named as an additional insured. If the contract is with a subsidiary one way to make sure that the supplier has sufficient assets to cover the loss may be to require a parent or company guarantee for the subsidiary. If the parent won’t provide that guarantee I would want to be named as an additional insured.
The reason why you require insurances in a contract is to ensure that those insurances provide the buyer with those levels of financial protection in the event of a loss. The insurance that you required or may even have to pay additional cost for to get your required limits doesn’t do you any good if can’t collect on the policy.