Certificates of insurance

You invest in the proper insurance protection for your business assets and
liabilities. But have you considered your potential risk from the work completed by subcontractors and vendors? If these
parties don’t have insurance, you could end
up paying dearly for their mistakes.

“It is important that business owners
know that the people doing work for them
or providing products and services have
insurance,” says Bob Wood, manager of the
Underwriting Practices Group at Westfield
“If an uninsured contractor
causes injuries or damages during a project, the owner might have liability for the
contractor’s actions. This responsibility
comes from the fact that the work was
done for the benefit of and on behalf of the

You clearly want to reduce the risk of
having your insurance company pay for the
actions of other businesses that work with
you. Spending a little time investigating
contractors’ insurance status before you
sign a deal can save you from spending a
great deal of time and money after an incident.

Smart Business spoke with Wood about
certificates of insurance and their role in
business owner risk management practices.

What are certificates of insurance?

Certificates of insurance are documents
that insured businesses can obtain to give
evidence that they have insurance coverage. These certificates include information
about the effective dates of the policy, the
limits of liability, the insurance company
providing the coverage and the certificate
holder, or the entity requesting the certificate. These certificates are different than
the policies that insured businesses have
as a guarantee of their coverage. Businesses don’t use certificates to negotiate
benefits with their insurance provider;
instead they have them as a way to show
other parties, like hiring companies, that
they have the appropriate coverage. If the
certificate of insurance and the actual policy contain different provisions, the insurance coverage will follow the specifications outlined in the actual policy.

What are potential consequences when business owners don’t collect the certificates?

As noted before, if an accident occurs
and the subcontractors or vendors do not
have insurance, the business owner could
end up incurring the liability. This would
mean additional expense for the company
and potential increase in its premiums.
This situation can be avoided if businesses
require that the people working for them
prove that they have insurance coverage.

Even if entities working for a company
do have insurance coverage, not collecting
certificates of insurance could still cost a
business owner. When hiring companies
choose not to keep records of these certificates, they are not following good risk
management practices. When their insurance company audits their policy, it might
charge additional premiums for the
increased potential loss exposure incurred
by not verifying proof of insurance. Not
having a certificate of insurance doesn’t
invalidate any insurance that contractors
or subcontractors might carry, but it does
show that business owners are exposing
themselves to preventable additional risk.

How can companies obtain certificates of

Business owners can easily obtain certificates of insurance by requesting them from
the subcontractors or vendors that want to
work with them. These entities can, in turn,
access the documentation from the insurance carrier that provides their coverage.
Hiring companies should insist that they
receive the certificates promptly so they
can review them prior to authorizing the
contractor or subcontractor to start work.
Once businesses have allowed third parties
to start work on a project, the contractors
have less of an incentive to follow through
with the documentation. Also, if uninsured
businesses even begin work on a project,
business owners have opened themselves
up to unnecessary liability. Business owners need to use reasonable care in reviewing the certificates, but generally, they
don’t need to validate the certificates of

What else should owners know?

If a contractor will perform a significant
amount of work for an owner, the hiring
firm should secure additional protection.
Business owners should discuss contractor, subcontractor and vendor insurance
requirements with their attorney prior to
signing substantial contracts. The attorney
can provide advice regarding limits of
insurance and other terms and conditions.

One of the common recommendations
for owners entering large deals with contractors is that owners should ask to be
added as an additional insured on the contractor’s policy. This goes one step beyond
the risk reduction provided by simply collecting a certificate of insurance. This distinction assures that the policy of the party
most in control of the losses applies first.
This protects hiring parties by preserving
their own insurance limits and reducing
their risk of loss. The certificate of insurance should outline the owner’s additional
insured status.

BOB WOOD is manager of the Underwriting Practices Group at
Westfield Insurance. Reach him at [email protected]
or (330) 887-6883. In business for more than 158 years,
Westfield Insurance provides commercial and personal insurance
services to customers in 17 states. For more information, visit