Certificates of insurance: Costly misconceptions

By Higginbotham on October 10 , 2016

Certificates of Insurance

If your business regularly hires contractors, you’re no stranger to certificates of insurance. They’re a seemingly simple risk management necessity. Yet, many business owners get tripped up by these “simple” documents. In fact, according to Trusted Choice, a certificate of insurance is involved in about one in every 25 errors and omissions (E&O) claims. Thirty-six percent of those cases involve a contractor improperly identifying or failing to add additional parties to be insured.

So these “simple” documents can get complex very quickly, usually due to a breakdown in communication or a lack of diligence on somebody’s part, or both.

Here are some of the most common – and costly – misconceptions to watch out for:

  • My contracts have the additional insured requirements written in, so I’m good to go. Not so fast. Even the strongest additional insured provision in your contract won’t do you much good if the other party doesn’t actually do anything to secure your status as an additional insured with its insurance company, or if you don’t bother to confirm that your business has actually been named as an additional insured. To be sure you’re protected, you must verify that the other party’s policy actually provides the additional insured coverage to you. This is one situation where trust should never be a substitute for verification.
  • I have valid certificates of insurance from my subs, so I’m covered. Not necessarily. A certificate of insurance is not insurance. It doesn’t create insurance coverage or confer status as an additional insured, and it isn’t a part of the insurance policy. It’s just a form document, a representation of the insurance policies that have been purchased by the party providing the evidence of insurance. However, the certificate of insurance is the industry standard for evidencing insurance coverages. Although checking policies is the only absolute way to verify coverage, it’s generally cost prohibitive. An alternative is to acquire the Additional Insured and Waiver of Subrogation endorsements and review for compliance. To make sure you actually have coverage, you should require copies of the insurance endorsements under which you’re an additional insured and keep them on file for as long as there’s any potential for a claim that might trigger those polices. You will also need to be aware of when these policies expire and request a renewal.
  • I’m listed as an Additional Insured on my sub’s policy, so I’ll be notified of its cancellation. Not likely, unless your contract contains a specific requirement that the additional insured receive notice of a cancellation at the same time as the named insured. Changes in certificate of insurance laws have increased the difficulty of obtaining evidence that proper notice would be received in the event there is a cancellation prior to expiration. With increased difficulty and cost, proof of actual endorsements showing proper cancellation can be sought. Canceled policies render the certificates of insurance obsolete.

Remember, possession of a certificate of insurance doesn’t automatically mean you’re protected, and mismanagement of these crucial documents can hit you with costly surprises and rack up claims with your insurance carrier.

Want to avoid costly misconceptions? Ask about Higginbotham’s CertCon Services, our in-house insurance certificate validation group. We process the certificates you get from your contractors, monitor expiration dates, confirm coverage amounts, communicate with providers and report their compliance status to you through a secure online program.


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Tags: Risk Management