How Important Is a Certificate of Insurance?

June 16, 2023
How important is a certificate of insurance

As a small business owner in the construction industry or another field where work-related accidents are highly plausible, managing vendor relationships and ensuring adequate insurance coverage is crucial to protect your business from potential risks.

One important piece of this process is obtaining and tracking certificates of insurance, or COIs, from all vendors and hired third parties. A certificate of insurance for small businesses refers to a summarized record of a downstream party’s coverage—and another piece of protection safeguarding your business.

Follow along in this blog, where we’ll explore the significance of COIs, why you need them from vendors, and how modern COI tracking solutions can simplify the process for your business.

When Do You Need a Certificate Of Insurance from a Vendor?

To review: COIs are documents created to standardize the insurance verification process that provides a brief summary of the important aspects regarding someone’s coverage. A vendor’s certificate of insurance serves as proof that they carry adequate insurance coverage, safeguarding your business from potential liability in the event of unforeseen incidents that can happen while you work with them.

Businesses and individuals need certificates of insurance for vendors they work with in order to confirm that they have the insurance coverage required for the job.

Basically, obtaining COIs is essential whenever you engage a vendor’s services, whether it’s subcontractors, suppliers, equipment rental companies, or other kinds of service providers across industries.

Why Would Someone Request a Certificate of Insurance?

Requesting a certificate of insurance is not only a responsible business practice that demonstrates your commitment to managing risk—it can be required to protect your business from being sued.

By collecting COIs from all vendors you work with, you ensure that they have the necessary insurance coverage to mitigate potential risks associated with their work. If a loss were to occur and a hired party was at fault, without the right coverage, you could end up footing the bill. 

This not only protects your business but also promotes trust, accountability, and a mutually beneficial relationship with your vendors, who will generally also be grateful that they have the right protections in place for a particular job.

Why Is a Certificate of Insurance Important?

As we’ve discussed, COIs are a very important part of insurance compliance for many reasons. Here are a few:

  • They provide verification of insurance coverage. At its core, the purpose of a COI is to provide documented evidence that a vendor has insurance coverage in place. COIs allow you to verify your vendors’ type of coverage, policy limits, and effective dates, ensuring their compliance with your requirements and contractual obligations.
  • They help mitigate your liability. By requesting COIs from the third parties you work with, you shift a portion of the potential liability from your business to the vendor’s insurance carrier. Then, in the case of accidents or damages caused by the vendor’s work, their insurance coverage steps in, reducing the potential legal complications and associated financial burdens for your business.
  • They confirm your compliance. Many industries have specific legal and contractual requirements regarding insurance coverage. By requesting COIs, you ensure that your business complies with these obligations, helping you avoid potential penalties and breaches of contract.

How Do I Ask a Vendor for a Certificate of Insurance?

Requesting a certificate of insurance from a vendor is a fairly straightforward process. Let’s walk through how to request a certificate of insurance from a vendor as the party that is hiring them.

First, you should determine your specific insurance requirements for the type of work being performed by the vendor. This includes the minimum coverage types, effictive dates, policy limits, and any endorsements you’re asking of them.

You’ll then clearly communicate your insurance requirements to the vendor, emphasizing the need for a current COI naming you as the certificate holder and, in some instances, your business as an additional insured.

Most vendors in their respective industries are accustomed to COI requests and will know how to take it from there, requesting and obtaining the certificate from their insurance provider and delivering it to you shortly thereafter.

What Does Certificate of Insurance Indicate?

As a summation of a policyholder’s insurance coverage, a COI includes essential information that indicates that a vendor has the insurance coverage in place that they say they do. Whether or not the coverage meets your business’ standards is another story.

To further illustrate all that an insurance certificate can tell you about, here’s some of what the documents typically include:

  • Policyholder details. The name and contact details of the insured party and the vendor you’re verifying coverage for.
  • Coverage details. The type of coverage (e.g., general liability, workers’ compensation, etc.).
  • Policy limits. The maximum amount the insurance company will pay for a covered claim. Be sure to confirm that the policy limits align with the level of risk associated with the work the vendor will be doing.
  • Effective dates. This indicates how long a vendor is covered. You should also verify that their dates of coverage fully include and overlap with their expected dates of work.

How myCOI Can Help

Managing multiple COIs manually can be time-consuming, redundant, and prone to human errors. Utilizing modern COI tracking solutions, such as an automated software platform like myCOI, can speed up the process for your business.

Give us a call if you’d like to learn more about how we can streamline your COI management efforts.

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