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So you may have received a Certificate of Insurance (COI) from your vendor, and you feel comfortable that its employees now can be allowed on your building’s property. To you this may seem like they have given you a familiar card from Monopoly. With your supposed “get out of jail free” card, you allow vendors access to your building and allow contractors to perform work on your property. However, you may not be as “free” as you think.
One of the most misunderstood and an abused practice in the insurance industry is how proper evidence of insurance is provided to another party to show that a company is in compliance with a contractual agreement. However, a certificate is an almost meaningless scrap of paper, as it merely provides evidence of insurance. The risk, therefore, may not be as properly transferred downstream as you might think.
Let’s assume that you have done your due diligence to make sure your vendor 1) has insurance and 2) that it protects you (as an “additional insured”). The question then becomes, “does the certificate or evidence of coverage carry a right to change the vendor’s coverage or obligations (i.e. notice of cancellation or adding additional coverage)?” The answer is normally no.
This scrap of paper hardly protects the certificate holder from any liability arising from vendor or contractor work, which is a common misconception regarding COIs. Understanding what they really are (and are not) will help you use them to your advantage.
Certificates Tell You Nothing
The first misconception regarding COI’s is that they convey coverage and are a literal interpretation of your vendor’s policy. While certificates may be an inefficient way to convey coverage, they are essential for business transactions as there is no other mechanism in place within the insurance industry to demonstrate coverage to a third party.
The issue is that a COI is not the insurance policy. The certificate shows only evidence of coverage but provides no information on specific coverages or exclusions, which leaves you assuming that all incidents would be covered. You assume this in the absence of a contract that details the perils covered.
These slips of paper are not issued by insurance companies but rather by insurance brokers. This is a very important distinction because errors can be made on the COI, and the insurance company is under no obligation to respond to potential claims just because a COI was issued with mistakes. It becomes important that a risk manager request specific wording to be included on the certificate.
Be Sure You’re an Additional Insured
The second biggest misconception with certificates is Additional Insureds. This is where many COIs conflict with your vendor’s insurance policies. Many believe that being named as an “additional insured” on the certificate means they are recognized as such under the policy.
However, if the actual insurance policy doesn’t have an endorsement (a legal document in the insurance policy) reflecting this coverage, the certificate is likely suspect.
Insurance companies emphasize that COIs are not insurance policies, no matter what the COIs say. This is why we at The ALS Group recommend that the vendor provide a property owner with a copy of the endorsement that specifically names them as an additional insured.
Have a Hold Harmless Agreement
Not only is a copy of the endorsement necessary, it must be supported by a correctly worded Hold Harmless Agreement. The hold harmless agreement is a legal document that removes liability from your building and places it solely with the vendor. Often this is the most difficult process in terms of certificate tracking, as it often gets tied down in their legal department.
The best way to get this agreement signed is to withhold payment. This provides the property owner with a tool to collect certificates and hold harmless agreements.
Track Your Certificates
Another best practice is to have a central hub to track your vendors’ certificates. This allows the certificate to be tracked by expiration date and can be used to track limits, correct wording on the certificate and, most importantly, whether the vendor is compliant.
At The ALS Group, this is treated as Rule #1 when tracking certificates, because without a place to store the information your certificate-tracking process can become a waste of your company’s time and expose your company to unneeded risk.
The moral of the story is that relying only on the COIs as your insurance protection may cause unwanted, unpleasant and costly surprises. While asking for and receiving a simple COI is easy, it does not give you the protection you want, and the worst time to find out that a COI is not worth the paper it is written on is after a claim.
COIs are the only practical way to demonstrate proof of coverage of insurance; they should be used prudently in conjunction with a properly worded contract and with the appropriate insurance company-issued endorsement.
If you need more information on any of the topics covered in this blog, or need help with any risk related issues please contact Albert Sica, Managing Principal, at 732.395.4251 or asica@thealsgroup.com.