The Dangers of Certificates of Insurance

A standard practice is to request Certificates of Insurance from subcontractors. While this is a good start to risk management, did you know that the Certificate is only reliable for the moment it was issued? Did you know that the Certificate has no legal bearing on the insurance coverage?

When someone says 'contractor', most people think of construction. However, contractors come in many different forms: they can fix your drain, fix your computer, build or demolish a structure, pick up your groceries, and just about anything else! Many times, the contract is tacitly implied and the question of them having insurance never comes up. However, when it does, especially in larger construction contracts, the common practice is to ask for a Certificate of Insurance.

On the surface, this makes sense, as a Certificate of Insurance will show the policy period, the person/entity insured, and what liability coverages they have. Typically, most people ask for a Certificate from the contractor before they allow the contractor to begin working. The idea is that if they can provide a Certificate of insurance, they must be insured, and if they’re insured, any damages they cause will be paid by their insurer.

While this perception is theoretically OK, there are multiple, insidious problems with Certificates of Insurance:

  • The document has no effect on coverage, and even says so in all caps on the top:

    • “THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER.”

  • The document further states that the insurance policies referenced supersede everything the Certificate says and that the Certificate does not constitute a contract between anyone.

  • The entity issuing the Certificate could easily have had the Certificate sent to you and then cancelled or modified the coverage—and nobody is legally required to tell you.

  • If any claims have occurred, the limits shown on the Certificate may have been reduced by those events, leaving a lesser amount for future claims.

  • Just because the Certificate says that you’re an Additional Insured, it doesn’t mean that you trully are.

  • And many other issues!

So if Certificates are so useless—and they are!—why do people ask for them?

It’s become a standard contracting industry practice, and despite all of the issues, they do make for a good ‘spot check’ and they weed-out (the honest) contractors who don’t carry insurance. But we would never recommend relying solely on a Certificate for all the aforementioned reasons and many more!

Since Certificates are worthless, what should I do instead?

A Certificate is a snapshot, only useful when paired with a thorough Subcontractor Agreement and checklist. Your agent should be able to assist you in setting standards for contractors/subcontractors that you use, along with providing boilerplate language to use in the Subcontractor Agreement and a checklist to audit the subcontractors’ insurance.

Do I really need a written agreement?

The Certificate expressly states that it’s useless, so you can’t rely on it. And while you can just use a verbal contract, the human memory is fickle and verbal contracts usually mean litigation after something bad happens. So wouldn’t it be nice to know from the beginning who will be responsible for paying and fixing problems that occur? Wouldn’t it be nice to know that there’s insurance to pay for the worst of those situations?

What is my recourse for mishandled Certificates of Insurance?

If you were to suffer a loss due to your reliance on a Certificate that was issued fraudulently or simply in-error, you might have some sort of legal recourse. However, the problem is that lawyers are expensive and litigation takes a long time. If something bad occurs and the insurance isn’t there, you may not have the time and/or money to go after the responsible party. Moreover, the responsible party may not have the money or assets to ultimately pay! So, it’s just better to have your ducks in a row from the start.

TL;DR: Certificates of Insurance are a handy spot-check, but to ensure your safety, you’ll need to take extra precautions!

Comment

Colten Zamrzla, CPCU

Colten first started in the insurance industry in 2010. He then pursued a Bachelor's degree in Finance & Insurance from the University of Nebraska at Lincoln. Once graduated, he immediately started studying for the CPCU and achieved it in just shy of a year. He is solely focused on commercial insurance, able to assist all types of businesses and nonprofits in risk management.

Colten has dedication and passion for his clients and the insurance industry as a whole. He dedicates time to furthering his knowledge on all things business and insurance, and he volunteers for the Independent Insurance Agents of Nebraska, a state-based trade association.