Before you begin working with a contractor or other third party, it’s important to make sure that they’re not bringing any extra financial risk to your business.
Of course, every new third party that you employ creates a new layer of risk for your company – unless they’re properly insured. Therefore, it’s a common business practice for companies to acquire evidence of all third parties’ insurance coverage (relevant to the job, of course).
Proof of insurance coverage can be provided in a couple of ways. They could carry their insurance policy around with them or make copies of it to distribute to vendors. This would be lengthy, inconvenient, and provide way more details than what you, as the business attempting to employ them, need. The other option is a certificate of insurance.
A certificate of insurance, also commonly referred to as an insurance certificate or COI, is a summarized version of an insurance policy. It’s an official legal document generated by a third party’s insurer that provides the information you need when it comes to ensuring third-party protections.
Read on to learn more about COIs.
Why Do Companies Ask For Certificates of Insurance?
Now that we’ve covered what a certificate of insurance is, let’s talk about when and why businesses actually need them. Companies typically ask for certificates of insurance for two major reasons:
- To verify that a third party they’re hiring has the correct insurance in place to do a job.
- To shield their business from unnecessary financial hardship in the event of an incident that could become a claim.
Both of these boil down to protecting your business from risk.
For the former, companies must ensure that the third parties they’re working with are properly licensed and insured. Some industries even require it, such as subcontractors in construction. By requesting a COI, companies can verify that their vendors and contractors have the necessary coverage to meet any legal and regulatory requirements.
For the latter, it’s important to mitigate risks for your business and avoid extraneous expenses like litigation stemming from claims. Limiting your liability exposure by requiring that contractors and vendors have adequate insurance coverage in place is a great way to stay protected. It also helps businesses get their projects completed on time and within budget when they don’t have to worry about unforeseen costs or delays associated with accidents.
Let’s pretend that you’re employed at a construction company as a hiring and compliance manager. It’s your responsibility to ensure that all hired subcontractors have the necessary insurance coverage to protect your business from potential liability that could lead to costly litigation. This is a point where you, as the person in charge of COI compliance, would need to ask all subcontractors wanting to work for your company for a certificate of insurance.
What Is the Difference Between a Policy and a COI?
Over the course of this article, we have used the terms “insurance coverage” and “insurance certificate.” While closely related concepts, they are not the same thing.
Insurance coverage provides financial protection to whoever purchases it by way of the insured paying premiums to the insurer and the insurer agreeing to pay for financial losses that the insured may incur due to covered events. A policy is a legal contract between a policyholder and an insurer that outlines the terms and conditions of that coverage.
Policies define things such as:
- Risks covered
- Exclusions
- Deductibles
- Limits of liability
- Premiums
Certificates of insurance, on the other hand, are documents that showcase proof of insurance coverage (in other words, proof that someone is currently covered by an insurance policy). COIs are usually issued by an insurance company at a policyholder’s request to provide evidence to an entity that they are correctly insured.
COIs outline things such as:
- Policyholder’s name and contact information
- Certificate holder (requester)’s name
- Policy number
- Effective dates of coverage
- Type of coverage provided
So, a policy is the set of rules that an insurance company follows to protect a vendor, whereas a certificate of insurance is a special document that proves that they have insurance.
They work together because a policy tells the policyholder and the insurance company what they’re responsible for doing in the case of a covered incident, and a related COI proves that a policyholder has the insurance coverage that they claim to.
Let’s go back to the example where you’re a hiring manager for a construction business. You wouldn’t need (or want) to go collect actual insurance policies from all of your contractors, subcontractors, suppliers, vendors, and other hired third parties. You’d simply send them a request for a COI, which each third party would have to procure from their insurer and then provide you with their certificate. You’d then verify the COI to ensure that it meets your business’s or project’s needs, and voilà, the work can begin!
We Have Your Business’ COI Needs Covered
If you would like additional assistance with managing COIs from various third parties, myCOI’s software can help. Our sophisticated but easy-to-use platform simplifies insurance tracking by providing your company with a solution to automate insurance certificate requests, collection, and compliance resolution. Say goodbye to time spent manually requesting, tracking, and managing COIs, and say hello to more time spent doing work you’re passionate about.