Certificate of Insurance – The Rhyme and Reason

Used as the accepted vehicle for proof of coverage certificates of insurance or COI’s make the insurance world go round. Contractors, subcontractors, project owners and just about anybody else who has anything to do with construction knows about certificates and how they can get in trouble for the lack of one. This is not a new subject but one that somehow always seems to be in the middle of audit problems and issues. So let’s take a look at them one more time! 

Certificates of insurance convey no rights to the certificate holder. Yep. That’s right. NO rights! A certificate is just an indication of the insurance policies in place as of the day and time it was produced. So don’t get the idea that just because you have a certificate of insurance that you have any rights or coverage under the policies listed, because you don’t!

Certificates are used for a variety of reasons but the primary reason is to show an interested party that there is or was a policy in place on the day the certificate is issued. You could receive a certificate issued on January 2nd that shows the effective date of coverage as January 1st that on January 4th is no longer active. 

In the workers compensation world, these documents are used to show that contractors and subcontractors carry, or at least carried, workers compensation coverage for a specified period. There are two things to keep in mind:

  1. Coverage
  2. Cost

That’s because these are the two areas most effected by certificates of insurance.

Let’s say, for example, that you run a commercial construction company and that you regularly subcontract work out to other contractors. You hire another contractor on a job and pay him $10,000 for the work. But you forgot to ask him for proof of workers compensation coverage. He doesn’t have coverage. During the audit process of your workers compensation policy the auditor discovers that you paid out $10,000 and have no corresponding certificate of insurance for that contractor. The auditor will include the cost of $10,000 in your exposure base (remuneration or payroll, whatever you want to call it.) Your premium has just been raised because the subcontractor you hired did not provide you with proof of coverage.  

Why did your insurance company charge you for the uninsured subcontractor? Go back to one of the basics and always remember this: If your insurance company would have had to pay a claim then they are due premium. Yep, it’s that simple. This scenario applies in most all states but there are a few exceptions so you must always check with your individual state’s rules for confirmation on how coverage applies to uninsured subcontractors!

Another thing to consider, when dealing with an uninsured subcontractor with a claim on your policy, is the impact that claim may have on your experience modification rate or EMR. If you allow an uninsured contractor to work and they are covered under your workers compensation policy then any injuries they sustain will show up on your EMR. Not only do you get to pay premium but the long term effect of an uninsured sub who’s had a claim under your policy can effect your premium for up to 3 years!

And it all starts with the lowly certificate of insurance. Remember this, certificates are only a conveyance of information, good only the day and time they are issued. A word of caution,  just because you’ve received a certificate doesn’t mean that coverage is in place when a claim happens!

Hope this helps you out! Thanks!