When you’re reading a certificate of insurance to make sure it’s “compliant,” you’re looking for a few things. First and foremost, that it’s a valid certificate (i.e. neither expired nor fraudulent). With fraudulent COIs on the rise, and relatively easy to create, this first criteria can be more difficult to verify than it may seem. Read How to Spot a Fake COI to learn more about how to catch fraudulent certificates of insurance.
Secondly, you’re making sure that it meets the insurance requirements stated in a contract. These can be as simple as “has insurance,” or they can have layers of limits and endorsements that must be met. For example, if the requirement is to have “General Liability insurance with a $1 Million per occurrence limit and a $2 Million aggregate limit, listing your company as an additional insured, with a waiver of subrogation in their favor,” having the right coverage and limits does not automatically make them compliant. In the next section, we’ll take a look at some of the terms in that sample requirement, and how they change the actual insurance policy.
For speed reading tips to quickly and thoroughly check ACORD certificates of insurance, check out How to Read a COI Like a Pro.
Key Terms on a COI
COVERAGES
This is the type of insurance a contractor is required to have, which determines which types of incidents will be covered under the policy. For example, General Liability insurance covers things like injury and property damage, whereas Professional Liability covers claims involving negligence, misrepresentation, violations of good faith and fair dealing, and inaccurate advice. If a consultant’s advice causes their client to lose money, their general liability insurance wouldn’t cover them. So, it’s important to ensure that contractors have the correct coverages.
Some common coverages go by multiple names (or have very similar counterparts). For example, if your requirement says $1M Errors and Omissions (E&O), and the COI has $1M Professional Liability, they would still be compliant. Another example are Fidelity Bonds, which are commonly called a Third Party Crime policy.
Compliance Tip:
When you’re setting requirements for your workforce, look carefully at what’s actually included in the various coverages. Sometimes the names don’t always perfectly describe what’s covered. For example, if a developer accidentally crashes their client’s site causing lost revenue, they would need professional liability insurance, rather than cyber. Likewise, if a lawyer’s car was broken into and files on their clients were stolen, they would need a cyber policy (rather than crime or property), because it covers lost or stolen data.
LIMITS
Limits determine how much money the insurance company will pay in the event of a claim. The per occurrence limit determines how much can be covered for a single incident. The aggregate limit determines how much can be paid in total during the policy period. Particularly for long-term engagements, it’s important to ensure that both of these are correct. If only one amount is listed in the requirement, it’s referring to the aggregate limit.
UMBRELLA LIABILITY & EXCESS LIABILITY
An umbrella liability policy (or excess liability policy) extends the limits of the other policies a contractor has. For example, if a contractor has a $1M General Liability insurance policy, and they cause an injury resulting in $1.5M in medical bills, their umbrella liability policy would kick in to cover the extra. It does not, however, provide any coverage on its own.
A common mistake is allowing contractors to replace a required coverage with umbrella rather than merely supplement the limits. For example, if the requirement is:
- $2,000,000 General Liability
- $1,000,000 Professional Liability
This contractor could meet the requirement:
- $1,000,000 General Liability
- $1,000,000 Professional Liability
- $1,000,000 Umbrella Liability
This contractor would not meet the requirement:
- $1,000,000 Professional Liability
- $2,000,000 Umbrella Liability
Typically, a contractor will need permission to use umbrella or excess liability to supplement their limits, unless it is expressly allowed in the requirement. This is common for professions where mistakes are infrequent, but the cost of those mistakes are high.
CLAIMS MADE v. OCCURRENCE
You know that column over on the left that has a few boxes checked sometimes, but you never really pay attention to? That’s where the insurer indicates whether it’s a “claims made” policy or an “occurrence” policy.
Claims Made means that the policy has to be active when a claim is made for it to be covered.
Occurrence means that the policy only has to be active when the incident that caused the claim occurs.
For example, let’s say a software developer helps an e-commerce company create their new app. A few months later, a bug in the code crashes the app for several hours causing lost revenue. The developer, no longer on contract with the company, has since cancelled their policy. In this case, a “claims made” policy would not cover the incident, since the claim was made after the policy was no longer active.
This is what an Occurrence Based policy will look like on a certificate of insurance. General Liability policies are nearly always occurrence based.
Compliance Tip:
It’s a good idea to keep track of the active policies that your contractors have in place for at least a year after they’ve completed an assignment. Even if you don’t specifically require that they stay covered after the assignment is over, at least you’ll have visibility into your risk gaps should something happen.
CERTIFICATE HOLDER
The certificate holder is the entity that is authorized by the named insured (the business who bought the insurance policy) to receive information and updates on the policy. It does not, however, extend any coverage to the entity listed as certificate holder. That’s where the Additional Insured comes in.
ADDITIONAL INSURED
Perhaps the most common endorsement for contingent workers, the Additional Insured is an entity brought under the protection of the policy by the named insured. Adding an “additional insured endorsement” is almost always done as part of a contractual requirement. In fact, it’s so common that COI compliance staff will often glaze over this part of a requirement without verifying that the COIs actually have the endorsement in place. Though it may seem like an afterthought on the certificate itself, the additional insured endorsement is actually one of the most important parts of the requirement for two reasons:
- It is the only thing that will extend the coverage a contractor has to protect your company in the event of a claim
- It is more likely that you’ll be notified if the policy is changed or cancelled.
Compliance Tip:
An additional insured endorsement is part of the actual insurance policy, not just language on the COI. That means that simply editing the PDF to include a sentence in the description of operations section without updating the policy itself will not necessarily provide you with any coverage.
BLANKET ADDITIONAL INSURED
Limits determine how much money the insurance company will pay in the event of a claim. The per occurrence limit determines how much can be covered for a single incident. The aggregate limit determines how much can be paid in total during the policy period. Particularly for long-term engagements, it’s important to ensure that both of these are correct. If only one amount is listed in the requirement, it’s referring to the aggregate limit.
WAIVER OF SUBROGATION
While an additional insured endorsement ensures that the contractor’s policy will extend to you in the event of a claim, their insurance company may still try to get that money back from you later. A waiver of subrogation takes away that option. It’s one of the more complicated liability insurance endorsements, but you’re probably familiar with the concept from the auto-insurance world:
Typically, when there is a car crash, both parties’ insurance companies will pay to resolve the claim quickly. Then, once fault has been established, the driver at fault’s insurance will essentially reimburse the other insurance company for the money they paid out.
A waiver of subrogation protects your company from the possibility of a contractor’s insurance company seeking compensation from yours after the initial claim is paid out.
PRIMARY & NONCONTRIBUTORY
Remember that chain of insurance claim pay-outs from before? Primary and Noncontributory language makes sure that even if multiple insurance policies could apply to the claim, it’s the contractor’s insurance that will pay first. That’s where the “primary” comes from. The “noncontributory” piece is similar to a waiver of subrogation, essentially stating that the insurance won’t seek contribution from other applicable insurance policies.
The key notion here is that, in many cases, a claim could be covered by your own corporate insurance policies as well as the contractor’s individual coverage. For example, let’s say a freelance copywriter is working for Google. They make an inaccurate claim which leads to a lawsuit. Google and the independent contractor would both have professional liability insurance for incidents like this. However, the contractor’s insurance is primary and noncontributory, meaning it will get tapped first to pay out the claim, and can’t try to recover the costs from Google’s corporate insurance.
Compliance Tip:
In many cases, the combination of additional insured and waiver of subrogation endorsements will be sufficient for contracts with independent contractors. This combination is preferable to a primary and noncontributory endorsement from a carrier perspective, making it easier to find (and often more affordable) for the contractor. Consult an insurance advisor to find out what’s best for your company!
The Easy Road to Compliance
Bunker is the fastest way to get Certificates of Insurance (COIs) that exactly meet contract requirements, including details like language and endorsements. Turn confusing contract requirements into simple digital templates. Share the link with contractors, or embed directly into onboarding materials and get a perfect Certificate of Insurance every time.
Contractors can purchase the required coverage online in less than 5 minutes!