But I want to caution you about something many of us skim past without much thought; it's called the Indemnification section of a contract.
Virtually every lease, licensing agreement and business deal contains an "indemnification" section. I know this first hand because in the course of my risk management practice, I review upwards of 15 contracts every week.
What I see in these "indemnification sections" would shake you to the bone, and most insurance policies fall short of providing the protection that is needed.
I dare you to grab just about any contract, even just the lease for the office you rent, and READ THE INDEMNITY SECTION, you will be surprised by what this "innocent" little clause actually says.
A Certificate of Insurance is intended to validate the existence of an insurance policy, but it does nothing more than provide a momentary and superficial snapshot of coverage and, (contrary to popular belief), it does not modify anything in the policy.
If you've ever been asked to provide proof of insurance for something, the chances are that a Certificate of Insurance has been the proof method your insurance agent has used.
I hope the articles and links in this month's eNewsletter will be useful resources for you and your leadership teams.
Dana Coates
President
United Agencies, Inc. ~ Western Division
A certificate of insurance is a document issued by or on behalf of an insurance company to a third party who has not contracted with the insurer to purchase an insurance policy. The most common type of certificate is that provided for informational purposes to advise a third party of the existence and amount of insurance issued to the named insured.
Such informational certificates are usually issued in conjunction with a contractual relationship between a third party and the named insured, requiring that the named insured have a particular amount and type of insurance. Such requirements are particularly common in construction contracts with large contractors, government entities, and major corporations.
In addition to describing the insurance available to the named insured, a certificate may also convey information that the certificate holder is an additional insured under the policy issued to the named insured, thus giving the certificate holder some interest in the policy itself.
A Certificate of Insurance validates the existence of an insurance policy. It may be issued by an issuer or an insurance agent or broker. A certificate of insurance should include the following:
- Name of the insurance company and policy number
- Policy period
- Name of the insured and address
- Description of coverage Description and locations of operation
- Name and address of certificate holder
- Policy limits
- Notice of cancellation provision
- Authorized signature and date
Certificates of Insurance Can Be Dangerous
Insurance certificates can be dangerous documents that migrate between the insured, the insurers and many other third parties. These documents can be dangerous because they can be issued without legitimate need, or with inappropriate language which can leave the issuer with the potential for a significant errors and omissions situation.
To avoid these risks, first ask yourself where the true risk lies, and whether the certificate will integrate with the contract verbiage. The point is that requiring a certificate of insurance is generally a result of negotiation between parties, which in most cases turns out to be a contractual obligation, so it is key to ask:
- Why is the certificate required?
- Why include _____ as an additional insured?
- Why add _____ as a vendor?
This will avoid the issuance of certificates being issued for no legitimate reason. Especially when in many instances, the insured has no idea of the potential liability created by asking for these documents, particularly when third parties are added as additional insureds.
It is important that you realize the potential detrimental effect on their limits created by the addition of multiple third parties as additional insureds.
In closing, it is very important to read and analyze the language of the contract. For example, consider the situation where someone has written into the verbiage a hold harmless agreement, where the expectation of both insured and third party is that the contract of insurance will provide protection, like so:
X Corporation hereby agrees to indemnify and hold harmless Y Corporation for any and all claims brought as a result of ____________.
The insurance contract does not provide coverage for any and all claims; it provides coverage for bodily injury, death, and property damage as declared within the terms and conditions of the contract. In a significant number of instances, neither insured nor their counsel or counsel representing a third party understand the separation of the insured risk and the contractual obligation.
Clearly, the contract between an indemnitee and indemnitor is a legal agreement to be found as law either at the time of execution or at point of adjudication. Likewise, the contract of insurance between an insured and insurer is also a legal agreement, subject to the terms and conditions of the insurance policy, which will be found as law either at the time of execution, loss, or adjudication.
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