The Importance of Certificates of Insurance for Businesses

Every day, businesses risk lawsuits and higher workers’ compensation costs due to uninsured contractors . Don’t expose your business to these threats. Protect your company by collecting and managing Certificates of Insurance (COIs), a crucial yet often overlooked safeguard. In this post, we will explain the importance of COIs and outline the best practices to manage them effectively, ensuring your business avoids these unnecessary risks.

COI Meaning: What is a Certificate of Insurance?

A Certificate of Insurance is a document showing an active insurance policy and providing details about the coverage. It proves that the necessary coverages, like liability and workers’ compensation insurance, are in force.

Why Your Business Needs to Require Certificates of Insurance

Protecting Your Business

Imagine hiring a contractor who accidentally damages your property or injures someone. Your business could be on the hook if that contractor lacks proper insurance. It’s common for companies to be liable for their subcontractors’ actions. Without COIs, your business could face substantial financial losses.

Avoiding Premium Audit Surprises

Ensuring all subcontractors are properly insured is crucial for workers’ compensation insurance. At the end of the year, insurance companies conduct premium audits to verify the accuracy of your reported payroll and the classification of your workers. If you don’t have proper COIs, auditors may consider your subcontractors uninsured.  Even if you have a COI on file, if it has expired or been canceled, making payments to these subcontractors counts towards your payroll. This can significantly impact your workers’ compensation premiums.

Best Practices for Managing Certificates of Insurance

To protect your business, set up a system to keep track of and update COIs for both liability and workers’ compensation:

• Proactive Collection and Verification: Require up-to-date certificates of workers’ compensation and liability insurance from your contractors before they start work. Keep these records organized and ensure they are updated.

• Setting Coverage Requirements: Set a minimum liability coverage limit, typically at least $1 million, and require contractors to list your company as an additional insured. This way, you will be notified if their coverage is canceled for any reason. Adding an additional insured is not typically possible with workers’ compensation insurance.

• Validation: Ensure the certificate comes directly from the contractor’s insurance agent to verify its authenticity. Or use a service like Trustlayer to manage your insurance certificates. Listen to Sharon Fox explain Trustlayer’s service on one of our podcast episodes here. Be vigilant, as fake certificates are increasingly common in the digital age.

• Formal Agreements: Always use formal agreements that clearly define the scope of work and insurance requirements. In addition, have those agreements reviewed by an attorney.

Conclusion

Requiring and managing Certificates of Insurance is crucial for protecting your business. By adopting these best practices, including setting the right insurance limits and ensuring additional insured status, you can avoid unexpected legal and financial issues and concentrate on more important things like growing your business. Was this information helpful?  Certificates of insurance are just one of the issues we review in our free risk assessment.  Sign up here.