Certificates of Insurance - Are They Important?

John A. Dirkse

Shortly after the formation of the Wisconsin County Mutual Insurance Corporation and the issuance of the first policies to the charter members, the four operating committees embarked on their respective tasks.

In April of 1988, at the direction of the Loss Prevention Committee and the Board of Directors, several memos were circulated to the membership concerning securing a Certificate of Insurance from outside firms or individuals contracted or associated with the operations of a County, that were not recognized as "Named Insureds" to the policy. Examples would be, independent contractors, Fair Boards or Associations, snowmobile clubs, etc...

In the weeks that followed, I received floods of calls asking, "why are Certificates of Insurance required?" or "we never were asked to do this in the past!" This article should clear up some of the questions surrounding Certificates of Insurance. I will address why they are needed, what to do with them and how to effectively manage them once you have received them.

WHY DOES A COUNTY NEED TO REQUEST A CERTIFICATE OF INSURANCE?

Those Counties requesting Certificates have undoubtedly ended up with a bulky file of papers, with no one certain just exactly why they are there and what security, if any, they provide. For this reason, let us define exactly what a Certificate is and how it can be put to the best use in the County's risk management efforts.

A certificate of insurance is nothing more than evidence that another party can satisfy various obligations. Among them, meet obligations of liability losses it has assumed under contract, provide protection for loss or damage to your property that it has assumed responsibility, or pay for the Workers' Compensation benefits of it's employees..etc.

Any time your County is involved with an outside party that increases your exposure to loss, you should require a certificate of insurance. This will help you to protect the County or any hold harmless agreement inserted in a contract, by demonstrating that the party has insurance to support this agreement.

You should however, recognize the limitations of a certificate of insurance. First, never consider a certificate and the policies described on the certificate as substitutes for your own insurance coverage. Secondly, a certificate of insurance only demonstrates the coverage and limits available at the time of issuance. This is a major concern today, because most of the policies issued today contain policy annual aggregate provisions that limit the amount of coverage available during a policy year. A certificate of insurance may show a limit of liability at the time of issuance, that is higher than the available limits at the time the contract is actually executed, the work prescribed has begun or at the time of loss.

WHAT CAN YOU DO?

In other articles we spoke of the various techniques available for the transfer of risk and obligations to fund losses. This is especially true when considering your options for dealing with the exposures created by outsiders. Among these considerations are:

1. Require the outside party to insure your firm as a named insured.
2. Require that the County be named as an additional insured.
3. Require that wording to the contract create a hold harmless clause.
4. Finally, assume or insure the risk yourself.

Each of the above are valid considerations and should be reviewed with each contractual agreement or any time the County could assume the liability of an outside party.

Whenever you exercise Options A or D above, the policy itself becomes the evidence of insurance. Therefore, only for Options C and B, would you rely on the certificate of insurance as evidence that coverage exists. With these options, you should further request that the certificate holder, (the County) be identified on the certificate as an additional insured. In cases where a close relationship exists, you may wish to also be furnished a copy of the actual endorsement listing you as an additional insured, (Additional Insured Endorsement).

A good example of such application would be the use of County premises by a tenant or lessee. For example, the Fair Board or Association, uses the fairgrounds for fair week and at other times during the year. The County should request that the Fair Board's insurer name the County as an Additional Insured and provide a copy of the endorsement effecting such coverage. Or consider a parish leasing a County owned community center. The parish, as a tenant, should provide the County with an endorsement naming the County as an Additional Insured.

IS THE CERTIFICATE ANY GOOD?

There are two major considerations to be discussed at this point.
First, what are the available limits of liability? With many annual aggregate policies, some of the limits of liability may have been exhausted and the actual limits of liability less than what is shown on the certificate of insurance. Secondly, after the certificate of insurance has been in file for some time, is there coverage still in force that can be called on to support losses of this outside party? With the addition of a "Notice of Cancellation" clause you can be reasonably sure that you, the certificate holder, will be notified if the policy represented by the certificate of insurance has been cancelled or altered.

HOW TO MANAGE CERTIFICATES.

Now that you have begun a program of requesting certificates of insurance, you have to manage them. Otherwise you will end up with a bulky, outdated file of paper. Consider using a central source of control, usually kept with the contract itself or possibly with your portfolio of liability policies.

Certificates of Insurance are dated, therefore if you are using a batch system of filing, you will need to create a suspense or "tickler" file that will bring forward each certificate as it expires. If there is still a need to require a certificate from this outside party, issue a letter requesting that the certificate be re-issued upon expiration. Follow this letter with a second request if the new certificate of insurance has not been received in a timely fashion.

A certificate of insurance can be an effective risk management tool if used and managed properly. Be sure to discuss your individual needs or requirements with your consultant, risk manager, agent or insurance company and implement an effective certificate of insurance program.