Certificates of Insurance: Why do we ask for “Insurance” Anyway?

May 17, 2017

Our last article points out that some level of risk (exposure to uncertainty) is inherent in everything we do. We have some measure of control when we keep all our operations within the organization, but what about when we enter into contracts with third parties or into the ever-favorite “partnership”?

Agreements with third parties necessarily result in an exchange of some sort: funds for service, service for service, service for funds etc… we all understand this, and if crafted correctly, these agreements will hopefully provide a net benefit to all parties involved. But we should also all understand that agreements with third parties, because they are necessarily arms-length, also results in an exchange of control over some amount of risk.

We of course try to manage these relationships through properly constructed contracts that appropriately divide responsibilities for key tasks and also losses.  Most agreements that we enter into include some sort of commitment to compensate one party for a loss that they might cause during the agreement, or perhaps even to defend a party should some sort of legal action take place as a result of the agreement.  In “jargoneese” we call these sections Hold Harmless agreements or Indemnities.

You might be feeling comfortable knowing that your partner will “have your back” if something goes wrong, especially if you are working with a municipality or a large corporation; but what if you are dealing with a small company, or an individual? What if you start thinking about if they will actually be able to pay for that bridge that they smashed into after they forgot to lower the bucket on their dump truck? What if they don’t actually have the cash to pay all the lawyers who are going to have to defend that addition error they made in that critical infrastructure engineering report?

Wouldn’t it be nice if you knew they had some kind of pool of cash, or assets that would stand behind that agreement to hold you from harm? Most partners we work with don’t keep these types of funds on hand to pay for losses, and even if they do, it may be hard to compel them to pass them along if an accident or incident takes place. Furthermore you don’t necessarily want to have to run a mini credit analysis of every group you partner with (although in some cases you might want to!).

These issues are of course what insurance clauses in agreements are for.  The indemnity creates the obligation to pay in the event of a loss, the requirement to hold insurance gives some measure of assurance that a party will be able to actually pay for that loss.

The next problem is of course that you could take it on faith that the partner will actually get insurance, but, if we are trying to minimize uncertainty, wouldn’t it be great if we could have some sort of certificate to prove that they actually have the types of insurance they asked you to provide?

This is precisely what a Certificate of Insurance (COI) is for. In its simplest form a COI, is a proof of insurance. It is a document issued to a Certificate Holder (the group asking for proof of insurance), that is endorsed by an insurance company (or broker) showing that insurance is indeed in place for the insured party. It is important to note that the COI is not an insurance policy in and of itself, and it does not typically in and of itself transfer any rights to the certificate holder. This is typically announced in bold and clear terms directly on the certificate.

So you may ask yourself: what good is the COI then if it isn’t an actual policy?  How can I actually get compensated from this COI?  Your contract may have requested the party to not only provide proof of insurance, but also add you as an additional insured to their insurance policy. If this is the case, the COI will need to have this identified and will serve as proof to you that you are added as a party on the policy, but usually only for liabilities (legal responsibilities) that come about from the operations of the insured party.

What this will do, is in theory allow you to bypass the insured party to access coverage, should they be refusing to forward a claim on to the insurer. Remember ‘partnerships’ can deteriorate very quickly when faced with a loss….

What to look for in COI?

COI’s can be very complicated, and is some cases confusing or difficult to understand. This section will focus on some tips for reviewing certificates that have been issued to TRCA.

A detailed checklist on what to look for in a COI has been developed by Frank Cowan Company and a link can be found here:

https://www.frankcowan.com/centre-of-excellence/view/certificate-of-insurance

But to get you started here are a few key items to look for:

• Is the name Toronto and Region Conservation Authority, 5 Shoreham Drive, Downsview ON M3N 1S4 listed correctly on the certificate?
• Is TRCA added as an additional insured?
• The name of the company as it is written in the contract you are dealing with listed as the “insured”
• Are the policies listed in the correct amounts, with the policy numbers and insurance companies?
• Are the policy dates on the policy still current?
• Does the policy show a notice of cancellation?
• Is the certificate free of any exceptions?
• Is the policy signed by the insurance company or the insurance Broker?

If you’ve reviewed the certificate and cannot answer any of these questions, have answered ‘no’ to these questions, have general questions about a COI, or don’t understand some components of the COI, forward the certificate to Risk Management for review.