What are Certificates of Insurance and What Do They Mean?

certificate of insurance

We often meet prospective clients who innocently relied on certificates of insurance presented to them by other companies they contracted with, only to find out that they weren’t worth the paper they were written on.

Maybe you are a property manager who has hired a vendor, or maybe you are a general contractor who has retained a subcontractor. Or perhaps you are a property owner who has hired a general contractor or construction manager. You have hired a good insurance lawyer and have protected yourself with a favorable, solid contract. In that contract, you have not only included a strong indemnity provision, but you have also wisely required the other party to take out insurance naming you and/or your business as additional insureds. Good. You are part of the way there. Now what?

Well, the contract requires the other party to “take out” the appropriate insurance, but how do you know that has been done? Many property owners, property managers, and contractors ask, or demand, that the other party provide a certificate of insurance showing that the appropriate insurance has indeed been obtained. Once in possession of a certificate of insurance showing that the proper insurance has seemingly been procured, work proceeds under the contract. Warning: all is possibly not as it seems.

We have seen lots of websites and online forums that provide misleading, or just incorrect, information about certificates of insurance. One website a client of ours showed us reads that a certificate of insurance “provides evidence that the contractor has insurance coverage and includes the type of coverage and the limits of the policy.” That statement is simply not accurate and can lead companies who rely on such information to make costly mistakes in their contract dealings. Certificates of insurance are not proof of coverage.

Unfortunately, a certificate of insurance alone does not mean that you are adequately protected, no matter how strong your contract may be. To fully appreciate this fact, you must first understand how a certificate of insurance comes into existence. Almost without exception, a certificate of insurance is issued by an insurance broker, not by an insurance company. The insurance company is not necessarily bound by a document generated by a third party. Therefore, even though the certificate of insurance reads that you and/or your business are named as additional insureds, the actual insurance policy may not have you and/or your business listed as additional insureds. As one Court in New York has said, “A Certificate of Insurance is insufficient, by itself, to show that such insurance has been purchased. The fact that [the owner] was named on the Certificate of Insurance is irrelevant; since the Certificate of Insurance was issued by [the contractor’s] broker, and not of an agent of [the insurance company], the certificate is not binding on [the insurance company].” If the insurance policy does not have you and/or your business listed, you may be out of luck and not be afforded insurance coverage under that policy, if you get sued. What this means is that although the party you contracted with agreed to arrange for you to be covered under its insurance policy, you may not, in fact, have that coverage and you will therefore have to either pursue coverage under your own insurance policy or pay any damages yourself.

A certificate of insurance may not be valid. Dishonest companies have been known to forge or falsify certificates of insurance and even well-intentioned companies may have allowed the insurance to lapse after purchasing a policy.

The party you are contracting with may have had every intention of securing the additional insured insurance coverage you have smartly contracted for. However, maybe the insurance broker did not obtain the appropriate insurance, maybe the broker or the contracting party innocently made a mistake, or maybe the appropriate insurance was too expensive. Maybe there is a sinister explanation for the wrong insurance being purchased or for coverage not being arranged for you. Either way, do not be fooled into thinking that the certificate of insurance language is protecting you and your business.

Also, you must read the certificate of insurance carefully. Many certificates of insurance contain this language, or language similar to it:

“This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not affirmatively pr negatively amend, extend or alter the coverage afforded by the policies below. This certificate of insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder.”

That means the certificate may not be “worth the paper” it is written on. That provision states that the certificate of insurance is not binding on the insurance company and that one must look to the actual insurance policy itself to see what insurance is being provided by the insurance company. As one Court in New York succinctly put it, a certificate of insurance is “not, in and of itself, a contract to insure.” And, that additional insurance protection you thought was in place may not, in fact, be there for you when you need it.

The certificate of insurance you receive from your hired contractor or vendor may have language similar to this:

“This is to certify that the policies of insurance listed below have been issued to the insured named above for the policy period indicating, notwithstanding any requirement, term or condition of any contract or other document with respect to which this certificate me be issued or may pertain, the insurance afforded by the policies described herein is subject to all the terms, exclusions, and conditions of such policies. Limits shown may have been reduced by paid claims.”

In simple English, that means, you need to have someone read the actual policy because the available insurance coverage is limited by the “terms, exclusions and conditions of such policies.” What is a wise, careful manager, contractor, or owner to do? The simple answer is, as stated above, to get someone to read the actual policy. Know what is excluded and what endorsements are contained in the policy itself, not just what the certificate of insurance says. Then, and only then, can you be sure that the company or person you are hiring has, indeed, taken out the required insurance that protects you and your business. Waiting to get sued before knowing what is in the insurance policy may have terrible consequences. The experienced business lawyers at Rosenbaum & Taylor, P.C. are here to help. We can read your certificates of insurance and your insurance policies and those of your contractors and vendors and explain them to you. We can make certain that you are protected. Do not take unnecessary risks by contracting with another company only to find out that the company or its subcontractors do not have the proper insurance in place.

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