This clause requires a vendor to maintain business interruption insurance, which compensates the vendor (or the customer, if named) for lost income and ongoing expenses if the vendor's operations are disrupted by covered events such as fire, natural disasters, equipment failure, or supply chain breakdowns. The clause typically specifies minimum coverage amounts and requires the vendor to maintain the policy throughout the contract term. This matters because if a critical vendor suddenly cannot fulfill its obligations due to an unforeseen disruption, the customer faces significant financial losses—lost revenue, idle equipment, breach of their own customer contracts, and emergency procurement costs. By contractually requiring business interruption insurance, the customer creates a financial backstop that compensates them if the vendor fails to perform due to operational disruption, reducing the customer's exposure to vendor-related risks.
Business interruption insurance is particularly important for vendors in supply-critical roles (manufacturers, logistics providers, data centers, critical service providers) where their failure directly impacts the customer's ability to operate. The clause essentially transfers the financial risk of vendor disruption from the customer to the vendor's insurance carrier.
If you're a customer requiring this clause, specify: (1) minimum coverage amounts that reflect your actual exposure if the vendor fails (calculate based on your daily revenue or critical operational costs), (2) that the policy covers a reasonable waiting period (typically 30-90 days) before benefits begin, (3) that coverage extends for a sufficient period (6-12 months of lost income), and (4) that you receive annual proof of coverage. If you're a vendor subject to this requirement, obtain quotes from insurance brokers experienced in your industry, as coverage costs and availability vary significantly. Negotiate the coverage amount to be proportionate to the contract value—don't accept unreasonably high requirements. Consider whether the customer will accept alternative risk mitigation (redundant facilities, backup suppliers, service level credits) instead of or in addition to insurance. Review your policy annually to ensure it remains adequate as your business grows.
Frequently Asked Questions
What does this clause mean in simple terms?
This clause requires a vendor to maintain business interruption insurance, which compensates the vendor (or the customer, if named) for lost income and ongoing expenses if the vendor's operations are disrupted by covered events such as fire, natural disasters, equipment failure, or supply chain breakdowns.
Why should I care about this clause?
The clause typically specifies minimum coverage amounts and requires the vendor to maintain the policy throughout the contract term.
What are my options?
This matters because if a critical vendor suddenly cannot fulfill its obligations due to an unforeseen disruption, the customer faces significant financial losses—lost revenue, idle equipment, breach of their own customer contracts, and emergency procurement costs.
How does this affect small businesses?
By contractually requiring business interruption insurance, the customer creates a financial backstop that compensates them if the vendor fails to perform due to operational disruption, reducing the customer's exposure to vendor-related risks.