Certificate of Insurance

The “certificate of insurance” might be the biggest headache for commercial insurance companies, agents, and their insured.

The headaches stem from general confusion about what exactly the insurance certificate means/demonstrates.

And communication, or lack thereof, between insurers and companies who require certificates to be issued prior to work being done.

What is a certificate of insurance?

A certificate of insurance, also referred to as a “certificate of liability insurance,” is a document that provides a description of coverage contained in a specific insured’s policy.

Ultimately, the certificate provides proof the insured has an in-force commercial general liability policy (CGL policy).

A company by the name of ACORD has a form that is generally accepted nationwide as proof of coverage.

ACORD is an organization that provides insurance related forms for just about every necessary aspect of insurance.

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Who needs certificates of insurance?

You can expect to have to provide evidence of liability insurance if you are a contractor or a sub-contractor working on any project. It cuts down on risk for both parties involved.

The companies that hire contractors will usually demand proof of coverage in order to bid on a particular job, let alone show up to the worksite.

So, let’s say you run a lawn mowing business or a pressure washing company, and you’ve been hired as a subcontractor on a large job. You can pretty much guarantee that you’ll be asked to show your certificate of insurance to ensure all parties are protected. This can sometimes even happen before any sort of contract is signed.

Without boring you with the details of liability, if you, as a contractor, perform work for another organization, that organization can be held liable for your work both while you are performing it and after the work is complete.

Read more about commercial general liability “products and completed operations” coverage for more details on that.

The company you are working for should not let you anywhere near the worksite without proof that you have insurance to protect them against any claims that arise out of doing business with you. It may sound harsh, but if there’s an accident, they want to make sure you’re protected in case there are any injuries or damages to the property you’ve worked on. The cost can rise sharply on either side of the claim, and sometimes the penalties for allowing someone who isn’t insured at a site can be even worse.

Note: Many companies will also require your CGL policy be endorsed to add them as an additional insured to further protect them from liability arising out of your work.

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Are there any problems with certificates of insurance?

There are two main problems with the issuance of a certificate of insurance.

The first problem centers on the insurance companies ability and willingness to issue a notice of cancellation of coverage to the certificate holder.

The second has to do with something we discussed earlier; additional insured status of the certificate holder. Let’s look at both concerns in a little more detail.

Problem 1: Notice of Cancellation

This is a “biggie.” As discussed, the certificate of insurance provides proof an insured has an in-force liability insurance policy.

What happens if the policy is cancelled half way through a completed job?

The certificate holder (the company who requested proof of insurance) would, of course, want to be notified.

If a policy cancels and a liability claim arises, the company who hired the contractor may be on the hook as the only in-force policy at the time of the incident. This would be problematic because then not only would they be responsible for anything that happens during that time, but they could possibly lose the contract for not having coverage.

ACORD has changed their form as of 2009 to severely limit the language pertaining to the notification of the certificate holder, basically stating that no notice will be given.

And that more importantly, it is not necessary to even give a notice of cancellation to a certificate holder.

Prior to 2009, the certificate contained language that gave the impression there would be a notice of cancellation provided to them within a 30-day timeframe.

The truth is that was rarely, if ever, the case. As a result, there were many contractors working on jobs that actually didn’t have insurance. This can wreak financial havoc on the company that employs them.

Why doesn’t the insurer have to give notice? The answer has to do with the fact that a certificate of insurance does not endorse an insurance policy in any way.

All it does is show that a particular company has insurance as of the date the certificate is generated…nothing more.

Only a policy endorsement would obligate an insurer to give notice of a coverage change (which isn’t taking place when the certificate is issued).

The certificate holder is not a party named (or insured) by a policy, unless the policy is specifically endorsed to add them as such.

Therefore, the certificate holder, in the eyes of the insurance industry, has about as much right to a notice of cancellation of the policy as your next door neighbor or any other random person on the street.

The devil is in the details here. Remember, an insurance agent can issue a certificate of insurance to anyone at any time…simply to show their insured has a policy.

As a result of this process, the insurance company is not informed that the document was generated and the certificate holder has no rights as they pertain to the policy.

This includes being notified any time something changes, perhaps a cancellation or perhaps a new location the insured purchases. It’s technically none of their business.

Of course, it may become their business if they are an additional insured, as this means they are actually added to the policy, and as a result, have rights associated with being an insured…including being notified when coverage is discontinued.

Problem 2: Additional Insured Parties

The second headache associated with certificates of insurance has to do with additional insured.

An additional insured is another person or entity who is added to an insurance policy (either when issued or by endorsement during the policy term) and retains the rights to the coverage afforded by the insurer.

As discussed above, many companies require a contractor to add their entity to their existing commercial general liability policy in order to avoid being named in a lawsuit in the event one is filed against either as a result of the contractor’s work.

The potential problem occurs when a company believes they have been added to a policy as an additional insured party when they have not.

Many insurance agents or producers (sales people) have run into trouble as a result of directly, or indirectly, causing the insured to believe the company who requested the certificate has been added as an additional insured party as a result of receiving the certificate of insurance…which is certainly not the case.

Remember, the distinction here is that a certificate of liability only provides proof that there is an existing in-force liability policy as of the date it is generated.

The only way an additional insured can be added to an existing policy is by contacting the insurer and requesting the entity be added as such.

Without the request to endorse the policy to add the other entity, no coverage has been provided for them. Period.

Only the original company, in this case our contractor, has coverage afforded by the policy in question.

The “business” of certificates of insurance can be quite confusing and financially dangerous if every party involved is not clear on the facts. That’s why it’s always better to get all the details before entering into any sort of contract. (For more information, read our “What are the benefits of insurance and why does it exist?“).

Be sure to contact your agent or insurer directly to be certain of the coverage afforded by your policy at any given time, and definitely don’t make promises of coverage unless you have written verification the coverage is in place. It may take additional time, but it’s going to save you from the hassle of having to explain why you weren’t covered.

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