Managing Certificates of Insurance.
Issue #7
May 14, 2007
My client was a manufacture of metal goods products with an extensive machine shop operation. The shop had overhead lighting, and the neon bulbs periodically needed replacing. An electrician was hired and subsequently sent an employee to replace all of the burned out lights. In less than twenty minutes after his arrival, the electrician’s employee fell from a ladder, impaling himself on one of the machines, and breaking his back. It was discovered that the electrician did not renew his workers compensation insurance; therefore the manufacturer’s workers compensation insurance was required to pay. This, in turn, resulted in a significant increase in the experience modification factor, and substantial additional premiums that had to be paid over a three year period by the manufacturer.
Another client subcontracted certain operations of their manufacturing process to a firm which provided employees who worked on premises. The insurance company auditor requested proof of insurance on behalf of the subcontractor at year end, and when none was provided, an assessment of 25% of the subcontract price was charged as additional payroll, with a corresponding increase in premium due.
A final example was a client who transported their goods via for-hire carriers, assuming that the trucker carried sufficient amounts of insurance on the cargo they hauled. When the truck overturned, the damages amounted to over $400,000 which, with only $100,000 in cargo coverage carried by the trucker, left more that $300,000 in uncovered loss.
These are only a few examples of incidents that could have been prevented with accurate certificates of insurance. The point is, a good certificate of insurance program is an effective tool for controlling your insurance costs, while at the same time reducing your chance of being held financially accountable for negligence on the part of contractors and others. Your business may be exposed to a variety of situations where you are not in control of the service rendered or how your property is used. Examples include:
- Outside vendors of supplies, materials and equipment;
- If you are selling or distributing a product manufactured by others;
- If you are in a construction or renovation mode, the general contractor and the subcontractors that you hire may create significant potential liabilities or vicarious liabilities for you;
- If you permit your property to be used by outside parities for events. Your liability is further exposed if alcohol is served;
- If you permit others to use your vehicles or equipment;
- Security Firms;
- Outside services such as janitorial, heating and air-conditioning, landscapers and caterers;
- Hiring professionals such as architects, engineers, and attorneys to perform work on your behalf;
- Hazardous waste disposal.
What can you do to protect yourself?
To transfer this risk, consider a contractual agreement that includes a hold harmless clause stating the contractor will indemnify and hold you harmless in the case of a loss. The contract typically specifies who is responsible for loss and under what circumstances. The agreement should also state what coverage’s are to be shown and what limits are required.
To make sure the other party is financially able to back its commitment a certificate of insurance evidencing insurance should be obtained before work begins. The certificate of insurance should include the following:
- Name and address of contractor or lessee’s insurance agent (if any);
- Name of insuring carrier;
- Name and address of the named insured;
- Name and address of certificate holder;
- Policy number;
- Effective and expiration dates of coverage;
- Description of operation or location of property;
- Coverage’s afforded – usually general liability, automobile liability, and workers’ compensation as a minimum;
- Limits of liability;
- 30 day notice of cancellation or material change in coverage;
- The authorized representative’s signature and date.
A certificate of insurance is nothing more than evidence that another party can satisfy various obligations including liability losses; provide protection for loss or damage to your property that another party has assumed under contract; or pay for the Workers' Compensation benefits of it's employees. It does not convey any coverage or rights to the certificate holder. Therefore, whenever possible we recommend that you require the other party’s insurance carrier provide you with an additional insured endorsement for at least the general liability portion of the policy.
As a side note, another advantage of obtaining certificates is that you can avoid unnecessary premium charges. Manual rules state premium must include the entire payroll of contractors or subcontractors unless "satisfactory evidence" of workers compensation insurance has been furnished.
It is important to recognize that unique exposures also require special coverage, e.g. false arrest or crime coverage for security firms, liquor liability if alcohol is involved; pollution for hazardous waste disposers; etc. A reminder system should also be established to ensure that you receive renewal certificates in a timely fashion.
A certificate of insurance is no substitute for your own insurance. It is only intended to be an additional line of defense. However, a consistent certificate program naming your company as an additional insured can be an effective tool to protect your insurance limits and ensure claims are correctly transferred to the appropriate party.
Got Questions?
Ed,
I have been requesting certificates when our company first hires outside firms to do work; however, I have not kept up with maintaining them beyond their expiration. Do you have any ideas to make this easy?
Jennifer
Jennifer
This is a common problem that I see quite often, and of course it does no good if certificates are not requested again after they expire. The easiest system that I have seen is an Excel spreadsheet that can be sorted by expiration date and followed up on periodically. The certificates themselves can be maintained in a binder in alphabetical order by name of your vendors.
Ed
Free for the asking . . .
Would you like a template that would make it easy to develop your requirements for insurance from other parties? Send me an email at ed@kempkey.com and I will send you a document titled “Insurance Requirements Template” from which you can cut and paste when requesting certificates.