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| RISK CONTROL BULLETIN |
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| An Introduction to Certificates of Insurance |
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What is a certificate of insurance?
A certificate of insurance is nothing more than a form outlining the coverage provided for a named insured by the various policies shown on it. Its only purpose is to provide information to a certificate holder who requires it. The certificate itself does not confer any rights to the certificate holder.
The most widely used certificate is ACORD form 25-S, published by a corporation named Agency-Company Organized Research and Development, with 7/97 being the most recent revision date. Standard language at the top of this form clearly states that it is issued for information purposes only, confers no rights to the certificate holder, and does not amend, extend, or alter the coverage afforded by the policies shown on it.
Why do I need a certificate of insurance?
In most construction contracts there are indemnity agreements whereby the party performing the work agrees to defend (as in legal defense) and hold harmless the other party to the contract against claims for certain damages arising from that work. For example, an electrical subcontractor may hold harmless a general contractor (GC) he is performing work for. In this situation, the electrical subcontractor is known as the indemnitor and the GC is known as the indemnitee.
If a third party makes a claim against both the subcontractor and the GC alleging bodily injury or property damage resulting from the subcontractor's work, the third party will rely on the subcontractor insurance policy to provide for their legal defense and to pay damages they are legally obligated to pay. The GC will usually want a certificate of insurance showing that the subcontractor has liability coverage with adequate policy limits to cover payment and defense costs for claims that may arise.
In most construction contracts today, in addition to being held harmless, any contractor who subcontractors work out will also require that they be endorsed as an additional insured on their subcontractor's liability policy. They will also want to be shown as an additional insured on the certificate of insurance that the subcontractor liability insurance company issues. A more in depth discussion on hold harmless agreements and additional insured status can be found in the FCCI Insurance Group bulletins referenced at the end of this bulletin.
Although our discussion has dealt only with liability insurance, if you subcontractor work to others you must also require subcontractors to provide you with certificates of insurance for workers compensation. If your subcontractors are uninsured for workers' compensation and one of their employees is injured on the job, your policy will cover the injury. Also, workers' compensation insurer will charge you premium for uninsured subcontractors who work for you.
Doesn't an insurance company providing coverage at least have to inform the certificate holder when a policy is canceled either by them or the insured?
No. An insurance company is under no obligation to notify certificate holders when a policy is canceled or expires. ACORD form 25-S clearly indicates that the insurance company issuing a policy will only endeavor to provide written notice to certificate holders named on the certificate, but will not be obligated or liable for failure to mail such notice. Most companies do their best to honor the spirit of the "will endeavor" statement. The number of days written notice that they will endeavor to provide will be shown on each ACORD certificate.
It seems there are considerable limitations on the benefits afforded by a certificate of insurance. What are other limitations a certificate holder should be aware of?
• With regard to coverage, all you can really be sure of is that the policies shown on the certificate were in effect at the time the certificate was issued. Remember, if they are canceled afterward, there is no guaranty that you will be notified in a timely manner, or notified at all.
• Certificates of Insurance are merely evidence of insurance in lieu of an actual copy of the insurance policy. They are only to be used to show evidence of insurance. They are not to be used to attempt to modify the terms of the policy itself. No insurer or agent should issue or sign a Certificate of Insurance that contains terms or conditions that differ from those in the underlying policy.
• Certificates cannot show if aggregate limits (i.e. the most the insurance company will pay out per policy or per project during the policy period) have been reduced. For example, if a subcontractor has a policy with a $300,000 general aggregate and has already had claims totaling $250,000, there would only be $50,000 left to pay for a claim that might arise from work the subcontractor is performing for you.
• Discrepancies may exist between coverage shown on the certificate and the actual coverage provided by the policy. Often, it is the agent or broker who issues the certificate of insurance and not the insurance company. If they issue a certificate showing you have been named as an additional insured, but they have not notified the insurer or the policy has not been endorsed for other reasons, you may not, in fact, be an additional insured. There may be exclusions on the subcontractor policy (i.e. Total Pollution Exclusion) that further limit policy coverage, and these will not normally be shown on the certificate. The subcontractor policy may contain language that says that coverage is excess over coverage provided by your policy. Fraudulent certificates may be issued showing policies that do not exist.
• The insurance carriers shown on the certificate may have a questionable rating by A.M. Best or others.
Can certificates of insurance be modified to provide me with more of the information I need?
Yes, certificates can be modified and it is even possible to draft a manuscript certificate tailored specifically to one's needs. There is no requirement to use the standard ACORD form. However, insurance agents, brokers, and companies are usually very reluctant to substantially modify insurance certificates or issue them in manuscript format. In particular, it's uncommon for insurers to agree to issue certificates that modify or eliminate any of the standard certificate disclaimer language. This is so because the courts are more likely to find that the insurer is bound by the certificate and may have to provide coverage that is not provided under the policy (i.e. coverage they never intended to provide). When agents or brokers are presented with manuscript certificates, they often prefer to have the insurance company approve and sign off on them.
Okay, I know I need certificates if I subcontractor work out to others, and I know certificates are at best an imperfect means for being sure my subcontractors have insurance. So, what do I do first?
• Speak with your agent to assess all your certificate of insurance needs.
• Establish a Certificate Of Insurance Program with written policy and procedure.
• Assign a specific person to be accountable for implementing the certificate control process
and for obtaining and maintaining the required certificates.
• Include a follow-up suspense system as part of the certificate control process to insure
current certificates (i.e. policy has not expired ). Do this at the start of work and monitor
for the duration of the subcontractor activities on the job.
• Include a review process to be sure certificates show all coverages, limits, and additional
insured status as required by you.
• Follow up with your agent when you suspect that insurance companies shown on a
certificate may not be financially sound or reliable.
• Accept only original copies or a fax to be followed shortly by an original. Do not accept
photocopies that may have been altered.
• Do not allow uninsured subcontractors on the job.
• Save old certificates in case a coverage issue arises in the future.
• Check your subcontractors out carefully to avoid problems.
• Document all persons brought on the jobsite by the subcontractor
Where can I learn more about contractual risk transfer practices?
• An Introduction To Hold Harmless Agreements, FCCI Insurance Group Risk Control Bulletin
• An Introduction to Additional Insured Status, FCCI Insurance Group Risk Control Bulletin
• Construction Risk Management, Volumes I & II, Pub. International Risk Management
Institute (IRMI) 972-960-7693
• Contractual Risk Transfer, Volumes I & II, Pub. IRMI
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