Certificates of Insurance

An important part of the risk management process is placing responsibility with the negligent party. A member’s contractual arrangement with a contractor or vendor usually includes a written agreement confirming the contractor or vendor accepts responsibility for his or her actions by stating he or she will defend, indemnify and hold the member harmless and agrees to keep in place adequate insurance coverage with appropriate liability limits.

The insurance requirements in the contract assure the member that the contractor has the financial means to meet the obligations assumed in the hold harmless and indemnification clause by agreeing to keep in place adequate insurance coverage with appropriate liability limits.

A certificate of insurance provides written verification of the coverage and liability limits that the contractor has purchased.

Common questions and concerns regarding certificates of insurance, including reasons they are important and ways to review and manage the process, are addressed.

What Is a Certificate of Insurance?

A certificate of insurance provides written verification of insurance coverage. It includes the name of the insurance carrier, policy numbers and lines and limits of coverage issued to an individual or entity.

In some circumstances, the member may be asked to provide a certificate of insurance to another party. Commonly, leases of office space and office equipment, or rental agreements of vehicles or heavy equipment require verification of insurance coverage. When members need to provide certificates of insurance, they should request a certificate of coverage via the member portal.

In most instances, the member asks an independent contractor, service provider or tenant in a lease agreement to provide verification of coverage in the form of a certificate of insurance.

Why Is It Important to Obtain Certificates of Insurance?

By obtaining a certificate of insurance, the member avoids discovering after the fact that the contractor does not have the type of insurance required, does not have appropriate liability limits or that the contractor has no coverage at all.

If the vendor, service provider, contractor or tenant does not have adequate insurance, the person who sustained damage or injury often looks to the member for compensation. Regardless of whether the member is eventually found to be responsible or even partially responsible, the member will likely be involved in a costly and time-consuming argument. Therefore, the importance of obtaining, reviewing and managing certificates of insurance cannot be overemphasized.

For What Should One Look in a Certificate of Insurance?

There should be enough information on the certificate to verify that the individual or entity’s insurance program meets the insurance requirements contained in the applicable agreement. At a minimum, all certificates issued to the member should:

• • Contain the name and address of the member as the certificate holder.

• • Include the insurance company name for each applicable policy issued for the independent contractor, vendor or service provider.

• • List the policy number, lines of coverage, expiration dates and limits of liability.

• • Indicate that the member will be included as an additional insured in accordance with the member’s insurance requirements in the bid specifications or contract. Professional liability and workers’ compensation are the exceptions.

• • Be an original document that has been signed by a person authorized by the insurer to bind coverage.

• • Indicate that the insurance is on an occurrence basis.

• • State notice will be given to the member of cancellation of any of the insurance policies listed on the certificate in accordance with the policy provisions.

Verify Contractor’s Coverage Complies with Member’s Requirements

The primary purpose of obtaining a certificate of insurance is to verify the existence of coverage and to verify that the contractor’s coverage and limits meet the member’s requirements as stated in the bid specifications and/or the contract.

The contractor should be required to include a certificate of insurance with his or her bid. This gives the member the opportunity to verify that the contractor’s coverage complies with the request for proposal (RFP) before the contract is awarded. It puts the prospective bidder on notice as to the member’s insurance requirements and allows the bidder to build his or her cost of insurance coverage into the estimate or bid. If bidding is not required, insurance specifications should be included in every contract.

The contractor’s coverage and limits shown on the certificate of insurance should meet or exceed all of the member’s requirements.

The certificate of insurance should also confirm that the member has been granted additional insured status as specified in the member’s insurance requirements. Additional insured status is intended to provide extra protection to the member in the event of a claim.

Status is typically confirmed on the certificate of insurance in one of two ways, depending on the edition date of the certificate form. Either the certificate includes a check box in a column adjoining the type of insurance column or it is shown in the large, narrative box near the bottom of the form titled description of operations.

Noting the member will be named an additional insured is not a guarantee that the policy has been endorsed accordingly. Therefore, the member should request a copy of the actual endorsement.

Managing the Process

The member should establish and maintain a process for managing contracts. The member’s contract file should always contain a current certificate of insurance. Managing contracts and certificates of insurance should include these following steps.

Obtain a signed, original certificate of insurance in compliance with the member’s established minimum coverage and liability limits :

• • A certificate of insurance should be required when the contract is executed.

• • The member should receive a current certificate of insurance before any work commences.

• • Obtain a renewed certificate of insurance if coverage expires before the project is complete.

Review certificates of insurance : 

• • Verify that the policy period covers the term of the project, contract or event.

• • Verify that coverage and limits meet the member’s minimum requirements. Members might establish a checklist for this purpose.

Enforce certificate of insurance requirements:

• • Establish and document procedures to follow when certificates are not received or the information is not in accordance with requirements established in the agreement. A letter seeking the needed changes should be sent to the other party and should be followed up until a current certificate of insurance that meets all requirements is received.

• • Members should consider using specific measures to ensure adherence to certificate of insurance requirements. These measures may include, with the advice and assistance of legal counsel, actions that have been stated in the contractual agreement, such as:

    • • Not allowing services to begin until satisfactory evidence of compliance is received.
    • • Withholding payment for services until satisfactory evidence of compliance is received.
    • • Terminating the contract unless satisfactory evidence of compliance is provided within a specified timeframe.

• • Monitor the process:

    • • Establish a reminder system that alerts the employee responsible for reviewing the certificates of insurance of coming policy expiration dates and target dates for compliance with any deficient items.

        • • A simple example of a reminder system is a follow-up file or log sorted based on insurance policy expiration dates or target compliance dates.

    • • Include a procedure for re-ordering certificates of insurance prior to policy expiration dates. This will help ensure that coverages and limits are maintained throughout the term of the project or agreement.

        • • A form letter can be created and sent to all appropriate recipients at least 60 days prior to the expiration date.

A certificate of insurance does not override the policy terms, conditions, limitations and exclusions. For example, additional insured status is provided by an endorsement or written amendment to the contractor’s underlying policy. Simply noting that the member is named as additional insured on the certificate of insurance is not a guarantee that the policy has been endorsed accordingly. Therefore, the member should request a copy of the actual endorsement.

To avoid costly and often complicated legal issues, MCIT recommends that members consult with their legal counsel before entering into any contractual agreements and, most importantly, any time they enter into an agreement that may involve assuming the liability of another party.

Recognizing the significance of each member determining the appropriate coverage(s) and limit requirements, MCIT has compiled resources to assist members in this process:

• Understanding Insurance Language in Contracts
• Coverages and Liability Limits for Independent Contractors

Members are always free to contact their MCIT risk management consultant toll-free at 1.866.547.6516 to discuss specific needs or concerns that they have.