Tech Topics: Certificates of Insurance

01 July 2015

A Certificate of Insurance verifies to a third party, with whom you have entered into a contractual agreement, that you carry insurance necessary to conduct the work contracted to complete.

Background
You have hired a contractor to erect a new building or building addition on your site. You know that there is a possibility that something could go wrong and cause a loss. As a risk manager, you do not want to assume the liabilities of this third party if you don’t have to. As a risk management tool, you should be securing this contractor’s certificates of Insurance proving that they carry adequate insurance coverage.

What Is It? 
A certificate of Insurance is a document issued by, or on behalf of, an insurance company evidencing the fact that an insurance policy has been written and includes a statement of coverage of the policy in general terms. Acting as a snapshot of the basic policy coverage and limits at the time of issuance, a certificate is commonly provided to advise a third party of the existence and amount of insurance issued to the named insured.

When do I need them? 
Certificates of Insurance are usually issued in conjunction with a contractual agreement between a third party and the named insured, requiring that the named insured have a particular amount and type of insurance.

In addition to describing the insurance available to the named insured, a certificate may also convey information that the certificate holder is an additional insured under the policy issued to the named insured, thus giving the certificate holder some interest in the policy itself.

What is the difference between a "Named Insured" and and "Additional Insured"? 
A “Named Insured” is any person, firm, or organization, or any of its members specifically designated by name as an insured(s) in an insurance policy, as distinguished from others that, although unnamed, fall within the policy definition of an "insured."

An additional insured is a person or organization added to a policy after the policy is written with the status of named insured. this entity would have the same rights and responsibilities as an entity named as an insured in the policy declarations (other than those rights and responsibilities reserved to the first named insured).

What limit should my contractors carry?
The answer is based on your risk management program and an assessment of what is at risk and what are the exposures. It is suggested that no contractor carry less than $1.0 million coverage. Some clients request a minimum of $2.0 million. Large projects where the exposure is high, the limit is often near $5.0 -$10.0 million. Keep in mind that when asking for larger limits, the increased cost for this coverage may flow through back to you.

What else should be considered?‚Äč 
Several things to consider:

  • If a contractor is leasing space on a long or short term basis you should be listed on the certificate of Insurance as an additional insured, including all your legal operating names. Being an additional insured on their policy extends their coverage to include the space as if there were another policy in place. This is limited, however, to the space or operations that are being carried out by the contractor. An example would be if a patron slipped and fell in the space and both the contractor and the property owner were named in a law suit, their policy would respond for both the retail contractor and the space. It is a means of risk transfer.
  • Ensure that the operations described on the certificate of Insurance is what the contractor is really doing. If a certificate of Insurance describes the operations as electrical contractor, there may not be coverage if the contractor was to carry out snow removal. This is termed “nondisclosure of a material fact” and could render denial of coverage.
  • Be sure the effective dates of the insurance coverage covers the time/dates of the work being completed. Asking for annual updates is always recommended. In some cases, where this is a year round or dedicated contractor, you can be given 30-60 days notice of cancellation or change in the policy. this would be also important for the large (high $$) contracts/projects.
  • Certificates of Insurance should be obtained annually and immediately upon expiry of the contractor’s policy.
  • What about Workers’ compensation coverage? Again, good risk management suggests you obtain proof of coverage. If the contractor does not have this coverage, you can become responsible for this contractor and all their hires. This means an occupational injury could be picked up by your company. In some cases, some smaller contractors do not have Workers’ compensation coverage. This may be an acceptable to you, but it can be mitigated through good contractor selection and controls. At least the risk is understood and not a surprise. as much as possible, you should be transferring this risk. In some provinces, request a “letter in good standing” from the workers compensation provider. Again, these should be requested annually as part of your contractor selection process.