Mr. Dahm

Insurance

Certificates of Insurance Can Be Dangerous to Your Health: Know What They Are and What They Cover

By Richard Dahm, Senior Risk Consultant, National Hospitality Division, Wells Fargo Insurance Services

Buying Business insurance for any business is a complicated process. Whether you're a small entity with one location or a multi-national corporation, insurance is never a topic of likeability. Encompassing a language of its own, insurance has defined itself to be understood only by the few and mostly by those that are in the industry or working directly for it. Those of us who have had the pleasure of learning about insurance have been educated more or less through the process of trial and error, prior claims and their brokers understanding of their clients need base. While the diversity of types insurance is endless, one common factor remains true with all businesses, the necessity to provide proof that they are in compliance with their insurance responsibilities. Whether it is workers compensation, general liability, directors and officers or property coverage, no business can escape the obligation to be able to produce a Certificate of Insurance. ** **

What exactly is a Certificate of Insurance?

A certificate of insurance is a separate document from an insurance policy. It summarizes the key elements of your insurance by verifying the types and amounts of coverage currently in place. The purpose of the certificate is to provide proof of compliance for your contractual obligations. While Certificates of Insurance at first glance may seem straightforward because the document is rather compact, elementary in nature and to the point in its summarization of your coverage, the importance and consideration for these documents are greatly overlooked in the purchasing process. Certificates are not the same as a policy and they do not offer any ability to modify a policy. Too often insurance contracts are purchased without the ability to be modified.

Key coverage such as additional insureds, waiver of subrogation and/or specific forms and endorsements are omitted from the decision process. Due to the omission of coverage, it leaves the insured with a useless policy or added costs that were not originally in the initial budget. Insureds as well as certificate holders often demand the need for specific language on their certificates. What they do not realize is that this language such as "additional insured", "waiver of subrogation" and others are a form of modification to their policy. In order to modify a certificate, a policy must be endorsed so that its coverage can be extended to the third party. This ultimately means that you are extending your coverage to include that of another party involved. This is usually the case when an organization is required to fulfill a contractual obligation. Whether you are a hotel, restaurant or contractor working on behalf of the hospitality industry, certificates are required and they must be considered in the purchasing process.

Certificate Claims

Each year thousands of certificates are issued many of which are either not needed or their language is inappropriate. Many times certificates will only be issued for a specific contract. However, it is common that an agent will automatically resend certificates of insurance for the renewing policy year without confirming if a certificate is still needed. Each year your broker or agent should confirm the validity of your certificate holder list. This is important because coverage should not be extended to another entity if you are no longer contractually obligated. Claims lodged against insurers and their agents are growing due to errors in the certificates' wordings.

Three Chronic Problems

There are three major chronic problems involving certificates, the first being the unwillingness of insurers to provide notice to certificate holders of cancellation. Although your contract with another party may state that your insurer will notify that party if your insurance policies are cancelled or not renewed, in actual practice the insurer is under no legal obligation to do so. Even if the third party is added to your policy as an additional insured, your policy's insurer will only notify you if they are intending to cancel or non-renew. Currently, there is no insurance solution to this discrepancy between contract language and policy.

Second, it is often found that contracts between parties in their business transactions have unusually burdensome insurance requirements. In some cases the requirements cannot be met. It is common to find that larger contactors, huge corporations, and public entities have more demands under their insurance agreements. For example, the other party may require you to waive subrogation for workers compensation, meaning that you (if self-insured) or your insurer cannot collect its losses back from the third party who caused the injury to your worker, no matter how negligent they were. Further, your insurance company may not agree to this waiver, which requires a special endorsement, or they may charge you a significant additional premium for providing the waiver.

The last problem involves certificate fraud or simple error represented by a broker or insured that presents coverage or conditions that do not exist. This is usually more prevalent in the construction industry where payments are withheld to subcontractors until proof of coverage is provided. The insurance broker may be pressured into misstating the actual coverages in order to permit their client to start or continue a contracted job assignment. Also, some brokers may delegate certificate issuance to untrained clerical workers without first reviewing the certificate requirements and verifying compliance with same. While this may seem unimportant to you, you can be sued for breach of contract by the third party who relied on your agreement to comply with the insurance requirements, and this type of breach of contract is not covered by your insurance policies.

Monitor Your Own Certificates and Contracts

They may often be amended where words like "endeavor to" are omitted and "the insurer shall" are put in its place. There will be instances where the insurer is obligated to advise a third party of claims, which could impair an important element of coverage and additional surplus layers. If the broker is issuing the certificate on your behalf, they must know in full what the contract requires and how your policies would respond.

Reading the Contract is Critical

It is estimated that only one out of ten certificates issued by a broker have actually had a broker review the entire contract before issuing a certificate of insurance. In most cases the insurance requirements are the only part of the contract an agent sees. While the specified insurance requirements are important, they may not be explicitly addressing all the concerns of the contract. It is vital that your broker read the entire contract before you sign it in order to discover where your actual risk lies and whether the certificate fits the verbiage of the contract.

Many times, there is no legitimate reason to issue a certificate and insureds have no idea of the potential liability created by requesting these documents, especially when third parties are added as additional insureds. It should be your broker's responsibility to help you understand the potential negative effect on your liability limits created by adding third parties.

Sometimes insurance requirements can be negotiated, with the other party. While some companies are not willing to budge on contract requirements, others may be more flexible to negotiate the terms and conditions originally set0. Larger companies sometimes set the limits much higher because they assume that the companies they negotiate with will carry the same coverages that they have in force.

Additionally, in issuing a certificate of insurance, it is critical to consider the exact language used to add an additional insured. A common mistake is to issue the certificate by referring to a specific contract, without adequate language that will address all potential liabilities--some of which could be uninsurable. This can create substantial legal liabilities if your obligations to the third party extend beyond what the certificate confirms.

Further, not all claims are covered as part of the insurance contract. It covers bodily injury, death, and property damage as stated in the terms and conditions of the contract. More often than not, neither the insured, their counsel, or the third party's counsel understand the separation of the insured risk from the full contractual obligation.

In Summary

Ask your insurance broker to help you determine if you should be obtaining certificates of insurance from your business relationships. In addition, when you are required to provide a certificate, send your broker a full copy of the contract and have him/her review it and make recommendations before you sign it. The full contract will allow the broker to assist you in determining the liabilities you are accepting and any that can be negotiated. In most cases you will find something in a contract that is not in your best interest and that can be negotiated. By being proactive with your certificates of insurance, you will ultimately save yourself from additional future headaches and costs.

Richard Dahm, Jr. is senior risk consultant for the National Hospitality Division of Wells Fargo Insurance Services, Clearwater, Florida. His expertise includes property, restaurant/hotel facilities, and risk management. He holds a BA in management from Eckerd College and an MBA from DeVry University. Richard is a member of the Florida Restaurant and Lodging Association. Mr. Dahm's knowledge, coupled with his professional staff of claims, safety, and marketing professionals enables him to provide hospitality executives with consultation that reduces insurance risks and premiums. Mr. Dahm can be contacted at 800-282-3343 Ext: 5436 or Richard.Dahm@wellsfargo.com Extended Bio...

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