OK, so you have received a Certificate of Insurance (COI) from your vendor, and you feel comfortable that its employees now can be allowed on your building’s property. To you this may seem like they have given you a familiar card from Monopoly. With your supposed “get out of jail free” card, you allow vendors access to your building and allow contractors to perform work on your property. However, you may not be as “free” as you think.
One of the most misunderstood and an abused practice in the insurance industry is how proper evidence of insurance is provided to another party to show that a company is in compliance with a contractual agreement. However, a certificate is an almost meaningless scrap of paper, as it merely provides evidence of insurance. The risk, therefore, may not be as properly transferred downstream as you might think.
Let’s assume that you have done your due diligence to make sure your vendor 1) has insurance and 2) that it protects you (as an “additional insured”). The question then becomes, “does the certificate or evidence of coverage carry a right to change the vendor’s coverage or obligations (i.e. notice of cancellation or adding additional coverage)?” The answer is normally no.
This scrap of paper hardly protects the certificate holder from any liability arising from vendor or contractor work, which is a common misconception regarding COIs. Understanding what they really are (and are not) will help you use them to your advantage.
Certificates Tell You Nothing
The first misconception regarding COI’s is that they convey coverage and are a literal interpretation of your vendor’s policy. While certificates may be an inefficient way to convey coverage, they are essential for business transactions as there is no other mechanism in place within the insurance industry to demonstrate coverage to a third party.
The issue is that a COI is not the insurance policy. The certificate shows only evidence of coverage but provides no information on specific coverages or exclusions, which leaves you assuming that all incidents would be covered. You assume this in the absence of a contract that details the perils covered.
These slips of paper are not issued by insurance companies but rather by insurance brokers. This is a very important distinction because errors can be made on the COI, and the insurance company is under no obligation to respond to potential claims just because a COI was issued with mistakes. It becomes important that a risk manager request specific wording to be included on the certificate.
Be Sure You’re an Additional Insured
The second biggest misconception with certificates is Additional Insureds. This is where many COIs conflict with your vendor’s insurance policies. Many believe that being named as an “additional insured” on the certificate means they are recognized as such under the policy.
However, if the actual insurance policy doesn’t have an endorsement (a legal document in the insurance policy) reflecting this coverage, the certificate is likely suspect.
Insurance companies emphasize that COIs are not insurance policies, no matter what the COIs say. This is why we at The ALS Group recommend that the vendor provide a property owner with a copy of the endorsement that specifically names them as an additional insured.
Have a Hold Harmless Agreement
Not only is a copy of the endorsement necessary, it must be supported by a correctly worded Hold Harmless Agreement. The hold harmless agreement is a legal document that removes liability from your building and places it solely with the vendor. Often this is the most difficult process in terms of certificate tracking, as it often gets tied down in their legal department.
The best way to get this agreement signed is to withhold payment. This provides the property owner with a tool to collect certificates and hold harmless agreements.
Track Your Certificates
Another best practice is to have a central hub to track your vendors’ certificates. This allows the certificate to be tracked by expiration date and can be used to track limits, correct wording on the certificate and, most importantly, whether the vendor is compliant.
At The ALS Group, this is treated as Rule #1 when tracking certificates, because without a place to store the information your certificate-tracking process can become a waste of your company’s time and expose your company to unneeded risk.
The moral of the story is that relying only on the COIs as your insurance protection may cause unwanted, unpleasant and costly surprises. While asking for and receiving a simple COI is easy, it does not give you the protection you want, and the worst time to find out that a COI is not worth the paper it is written on is after a claim.
COIs are the only practical way to demonstrate proof of coverage of insurance; they should be used prudently in conjunction with a properly worded contract and with the appropriate insurance company-issued endorsement.
For more information, contact The ALS Group for more information.
2011 was one of the most challenging years for many business owners and will be one of the most costly for insurers. Losses from insured natural have exceeded $100bn for 2011 undoubtedly triggering an opportunistic response from insurers. This on top of the increased scrutiny from stakeholders has put company senior leadership in the “hot seat” to be vigilant to mange risk appropriately. Company’s are still struggling under difficult economic times and need to be aware of and strive to manage their Total Cost of Risk (TCoR).
Not that anyone is short of 2012 resolutions, but we thought we would provide a convenient “checklist” of things you may want to put on your insurance and risk management agenda for the New Year.
If you have any questions or would like some help getting starting with any of the suggestions please do not hesitate to contact me.
Click [here] to read the full article.
Albert Sica’s article on bed bug insurance, “Bed Bug Insurance… Really?“, has been published in the November 2011 edition of the Property Owners Association of NJ – News & Views.
To read the entire article, please click here.
Trying to insulate yourself from downstream risk is always a suggested (if not arduous) Risk Management Best Practice. In the attached Rough Notes article, Umbrella “Trigger Disputed”, regarding Vassar College, there are a few twists and turns to take note of.
First, I think we all agree that a properly constructed insurance and indemnity provision is a critical contract component. Particularly, if the “upstream” party desires effective risk transfer. Care must be taken in drafting so these provisions are reasonable and conform to state anti-indemnity statutes.
Next, obtaining appropriate evidence of insurance is a huge but critically important undertaking. It is not sufficient to “just” get a Certificate of Insurance, but you need to make sure that relevant policy endorsements (for both primary and excess liability) are attached to the Certificate. That’s where the real fun starts. Examining the documents to ensure they reflect and satisfy the requirements specified in the contract will take some time and technical understanding.
Your next challenge is maintaining these documents in an orderly fashion, current and easily accessible. I would strongly suggest scanning the contract and proof of insurance, along with entering them into a tracking system. The ALS Group uses a “contracts register” to record this information when requested by a client.
Now that you have a good contract and supporting documentation on the counterparties insurance, using them effectively when a claim comes in is a fundamental part of this process. We strongly encourage the upstream party to take notice of both their counterparty and their counterparty’s primary and excess carriers. This is critical to preserve your rights on their policies and avoid potential “late notice” as in the Vassar case attached.
It is also very important to make it clear in the contract that all counterparty insurance is Primary and Non-Contributory. You should get endorsements or policy provisions from both primary and excess liability that evidence same.
Engineering and execution of contractual risk is arduous but well worth the effort. It is a fundamental Risk Management Best Practice to lower your company’s Total Cost of Risk (TCoR) and to demonstrate a consistent Risk Management posture with your insurance vendors.
Make the transfer terms reasonable and appropriate. Have a tracking and enforcement system and…Update! Update! Update! Vigilance is key!!!!
Al Sica recently wrote the article on “Supply Chain Risk: Hidden Exposures for Your Company” that was published in the June 2011 Contract Management Magazine. From his article you can learn how to develop a formal process to identify risks at each level of your supply chain, the likelihood those risks will occur, the harm each would present and determine how to identify strategies to deal with them. Supply chain issues are a growing concern for companies after the continuous natural disasters that are occurring both inside and outside the U.S.
Click here to read the article: “Supply Chain Risk: Hidden Exposures for Your Company”
Click here to visit Contract Management Magazine.
Al recently authored an article, “Landlords, Risk and Insurance Buyer Beware.” The article highlights the risks landlords face with different insurance policies and multiple coverages. The article emphasizes the importance to ask questions of a qualified insurance professional on coverage, program structure, and loss of income.
Read more about coverage’s, the transfer of risk, and landlord insurance.
Controlled Insurance Programs (CIP) are becoming more and more common today but a contractor must be very careful to examine the terms and conditions of the CIP carefully as this may be their sole source of coverage. One of the most misunderstood issues is what happens when a CIP is cancelled. Virtually every CIP program has a section in the “manual” that allows for the program to be cancelled with some notice (hopefully) to the contractor. In many cases it could be a short as 30 days. What happens to the bid-deducts? Can you now submit a change order to increase your cost to Include insurance? Does the work you did prior still get coverage under the CIP? What about completed operations? To complicate matters many contractors have a “absolute wrap-up exclusion form [ISO CG 2154]. Pay close attention to the third condition in the second column that states “this exclusion applies whether or not the consolidated (wrap-up) insurance program: (3) Remains in effect” – So, when the CIP is cancelled the contractor can find themselves without ANY coverage unless they can scramble to get an exception to the exclusion.
Construction insurance coverage is very complex and OCIP/CCIP programs only add to the complexity for a contractor. We strongly suggest that you do a thoughtful review anytime you are being asked to enroll in a CIP as the decision should not be taken lightly.
In today’s ever changing global economy and with the increase of just-in-time inventory, mitigating supply chain risk is vital to an organization’s survival. Supply chain risk is one of the top 10 business risks that senior leadership faces.
With the recent global event in Egypt and the Middle East along with the natural catastrophe in New Zealand, the almost overnight impact on commodity prices and availability of goods from those areas, underscores the need to understand supply chain vulnerabilities. It is important that Senior Management start planning and taking a proactive approach to ensure that their supply chain remains viable. Using simple tools like the risk register for example, in combination with a rigorous analysis can allow a company to better recognize the impact of their supply chain risk.
Click here for a more in-depth look at Supply Chain Risk.
An article in the Wall Street Journal, dated October 22, 2010, reported that The Avalon on Chrystie Place settled with the U.S. Attorney’s Office for $2.2 million, to cover discrimination claims made by persons with disabilities because of failure to abide by FHA Guidelines set in 1991. The Avalon is just one of eleven developers facing civil action regarding discrimination against disabled persons. Other Owners/Landlords/Building Managers across the country are facing heavy costs in order to make their buildings compliant with the 1991 Fair Housing Act. A thorough Risk Management Assessment can help identify and mitigate risks for both first and third party exposures.
Read the FHA-ADA Article.
Postponing Tuesday night’s Knicks game not only prevented fans from watching their team but kept fans away from Madison Square Garden. The N.Y. Knicks game was postponed due to suspicion that asbestos related material was falling from the rafters at Madison Square Garden.
The last minute cancellation of Tuesday night’s game highlights how important risk considerations are with construction or capital improvement projects. There are loss of revenue issues and potentially direct damage losses all stemming from what was believed to be an Asbestos (environmental) cause. Such issues are generally excluded from most standard property and liability policies which highlights this occurrence. Understanding risk and coverage is a challenge to begin with but especially challenging when under public pressure. The potential reputation risks abound as well, with even the hint of concern to frequent a location, the result can be devastating for future business.
This event highlights how a thoughtful risk management review may have prepared the “owner” for financial consequences from such an event. While Environmental Insurance is widely available, it is often misunderstood and passed over if a lender or other stakeholder doesn’t mandate its purchase. Both direct and consequential loss along with protecting the Insured from third party claimants is available from the environmental insurance marketplace today. Although the N.Y. Department of Environmental Protection found no traces of asbestos, the Knicks franchise and MSG still may suffer several negative consequences that could have been mitigated through adequate risk review.
Joseph Boren, CEO of Ironshore Environmental highlights that asbestos scare “…underscores the needs for both contractors and real estate owners to carry environmental insurance. In the absence of such coverage, liable parties will find they almost certainly do not have insurance coverage”.
A proper Risk Management Assessment (RMA) can surface such risks and offer suggestions for their mitigation. As independent insurance consultants we are continually working with our clients on identifying such issues to lower their Total Cost of Risk (TCoR).
Please let me know if we can help with any issues you may face on a construction or capital improvement project.
Over the last 10 years the advent of an Owner Controlled Insurance Program (OCIP) has gained popularity for many reasons. Theoretically, buying one Program for the benefit of all parties to the Project provides cost efficiency and ease of claims administration. There is reduced “finger pointing” amongst [contractor] insurers and “control” of the site generally improves.
OCIP’s also have a downside, the Contractors “enrolled” often give up their coverage in deference to the CIP. Having a broad “wrap up exclusion” on the contractor’s policy is not uncommon (Endorsement CG 21 54 01 96). There is often little or very superficial review of the CIP and a genuine trust that the CIP will continue through the State Period of Repose (statutes_of_repose.09.09.09.pdf).
This brings up some very disturbing issues that need to be surfaced by the Contractor:
|1.||Am I giving up my coverage (by virtue of an exclusion to my policy) if I enroll in the OCIP or CCIP?|
|2.||Is the coverage being afforded in the CIP at least as broad as what the Contractor has? Who is doing the “due diligence” on the CIP coverage?|
|3.||What assurances do I have that the coverage will, in fact, stay in effect through the Period of Repose? Is the full “period” afforded or a shorter period of time, say 3-5 years? Are the limits sufficient for all contractors on the Project?|
|4.||How is call back coverage afforded? Will your exclusion prohibit coverage for call backs (warranty work) after substantial completion? Does the CIP cover that? You’ll be surprised how many times there is a gap where NO coverage is afforded.|
|5.||Can the CIP be “prematurely” terminated by the Sponsor? What recourse do you have in such a situation? Would you even know (most times notification is haphazard)?|
There is an interesting article that recently appeared in Construction Executive that deals with some of the issues noted above (Const Exec OCIP’s April 2010.pdf). We strongly suggest that anyone that is considering a CIP proceed with caution and review the terms of coverage carefully to make sure you are covered. Please feel free to contact me to discuss ways to have coverage afforded even when things take an unexpected turn.
Albert Sica is the Managing Principal of the ALS Group. For more information call 732-395-4250