When companies work on projects involving multiple parties, they often have to deal with several liability concerns, including risks of property damage, bodily harm, product liabilities and advertising. Every party to a business agreement should have some type of insurance policy to mitigate these risks, but reviewing every insurance policy is time-consuming and introduces the possibility that essential details will be overlooked. Certificates of insurance can help to reduce these risks and liabilities. The best business insurance providers almost all provide a certificate of proof, be sure your partner offers one if a COI will be important your day to day or project.
What is a certificate of insurance?
A certificate of insurance (COI) is a one-page document that provides a quick overview of key details found within an insurance policy. The COI also serves as verification of insurance and proof of specific insurance coverage, although it is not a substitute for an actual insurance policy.
- Clients may request a COI as a condition of doing business with the insurance holder. The COI can be issued without a specific certificate holder for information purposes only. The holder of a COI might be a direct beneficiary of the insurance coverage, or
- they might have limited or no direct financial benefit from the insurance coverage (i.e., they want evidence of the coverage and notification if the policy is canceled).
Why are certificates of insurance important?
There are four key reasons a COI is important:
- Serves as proof of insurance. A COI summarizes the existence of, and contents within, the insurance policy. Different vendors and contractors require various levels and types of insurance, so the COI helps to keep this information organized.
- Saves time. A COI provides quick access to the information included in the insurance policy, thereby saving you time. Many insurance policies are several pages long, so a COI reduces the amount of paperwork that must be stored and reviewed. When you are dealing with multiple parties, it can be difficult and time-consuming to organize all of the insurance documents and ensure that each party has the requisite coverage. Storing multiple COIs is more efficient.
- Reduces legal risks. Having a COI lessens the likelihood of liability, as a loss can be transferred to the third party's insurer. When dealing with multiple vendors and contractors, you might become vulnerable to the details of their respective policies, as every employee at each of the companies brings the risk of personal injury and property damage.
- Protects against outsourcing risks. A COI guards you from the risks that could arise from outsourcing work to third parties, which should have their own insurance coverage. A COI becomes more important if you work with multiple parties, which should have their own insurance policies for their respective vendors and contractors. Doing your due diligence to check vendors' insurance policies can protect you against many different risk scenarios.
Information included in a certificate of insurance
A COI should include the following information:
- The name of the policyholder
- The effective date of the policy
- The type of coverage involved
- The policy's limits
When you assess the contents of the COI, make sure to take the following steps:
- Contact the issuing insurance agent to verify the authenticity of the COI
- Verify that the policy limits provide adequate protection for the project
- Ensure that the effective and expiration dates are in line with the length of time the policyholder is expected to participate in the project
Additional insured coverage
Some clients require insurance policies to cover other people, such as subcontractors and employees, who will not have their own insurance coverage. This additional coverage will typically require an endorsement, which will provide blanket coverage to any person or organization that falls under the policy's definition of additional insured. Some endorsements specifically cover a company or person listed on the COI, while others are designed for specific types of businesses or industries (e.g., landlords, general contractors).
To qualify for additional insured coverage, the additional insured must have a business relationship with the business to whose insurance it is being added (i.e., the named insured). Its corporate activities must also present a risk of third-party lawsuits against your company. If a claim filed against your company is covered by the endorsement, the policyholder's insurance will cover the claim first; your liability policy will apply if you reach the limit of your additional insurance coverage maximum.
Types of certificates of insurance
There are several types of COIs, so make sure you know the differences before deciding which one is right for a particular situation.
Certificate of liability insurance
The project owner should review the certificate of liability insurance to ensure they are protected and that it extends protection to the project manager, lender and other key parties. Reviewing the COI will ensure that the risk is adequately transferred to a third party.
Many situations require one or both parties to have a certificate of liability insurance. For example, if you lease a building, the property owner or rental property manager might require you to provide a certificate of liability insurance to assure them that they will be protected from liability if someone is injured at your place of business.
Contractors or vendors might need to show a certificate of liability insurance before visiting a client's location or performing some types of work. The client that purchases goods or services from the contractor or vendor will also require a COI, which will protect the client if the contractor or vendor damages the property or causes personal injury while on the client's premises. It will also protect the client's property if the contractor or vendor damages the property while working on-site.
The certificate of liability insurance should include the following coverage:
- Additional insured status for the correct entities
- A description of the operations involving the vendor or contractor
- A waiver of subrogation
- Primary and noncontributory coverage
Certificate of automobile liability insurance
A certificate of automobile liability insurance can be presented as the full-size document issued by the automobile insurance company, as per the policyholder's request, or as an insurance identification card (e.g., what you keep in your vehicle). Review the certificate for all vendor-owned, leased, hired and non-owned vehicles.
The lender that finances the vehicle purchase may request the certificate in different situations. For example, during financing, the lender typically requests that the borrower maintain the full coverage insurance on the vehicle until they have completely paid off the vehicle. The lender also requires that its company be named as an additional insurance party on the automobile liability policy so the company will be compensated if the vehicle is severely damaged in an accident.
A lender may request a certificate of automobile insurance if they have reason to suspect you are not maintaining sufficient insurance coverage. Under these circumstances, they will likely require a signed document from the insurance company or broker.
Certificate of workers' compensation insurance
A certificate of workers' compensation insurance is proof that a business carries workers' compensation coverage. All business owners must carry this coverage for employees and contractors. Companies that do not carry the legally required workers' compensation coverage can face fines and penalties according to the state's laws and regulations. Depending on state laws, independent contractors and subcontractors may or may not be required to carry this coverage for their employees. However, their clients and suppliers might require workers' compensation coverage to work on their site and, in that case, will ask for a COI.
Most construction jobs and large projects usually have a project management company or general contractor responsible for the project's overall completion. These companies typically employ contractors or vendors to perform parts of the work. Most states require businesses to have workers' compensation insurance to cover general contractors, their employees or project management companies. As a result, they require certificates of workers' compensation insurance from subcontractors and vendors involved in the project. In this case, having a COI protects the company from liability if a subcontractor or vendor employee is injured on the premises or in the process of doing work for the company. [Read more about the workers compensation claims process.]
Obtaining a certificate of insurance
When a client requests a COI, ask them to provide the required minimums and limits for your insurance coverage. Record your client's name, address and tax identification number in case you need to increase your premium.
The client may request the COI directly from the business owner's or contractor's insurance company or broker. Under these circumstances, the client becomes a certificate holder. The client's name and contact information appears along with statements that show the insurer's obligation to notify the client of policy cancellations.
Contact your insurance company or broker. Provide them with the details for the minimum coverage amounts, and state that you need a COI as proof of insurance. If your current insurance policy meets the client's requirements, your insurance company or broker will secure the COI. If you need to increase coverage or purchase a rider for the project's insurance requirements, your insurance company or broker will provide you with the necessary details and paperwork to complete.
Once the details have been worked out, your insurance company or broker will create the COI. They will then send a printed COI to you, which you can submit to the client to complete the transaction and then sign a contract to begin your project.