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Contractors, Subcontractors and Insurance Certificates

Information, issues and problems with certificates of insurance and contractors..

Why does a Contractor need a Certificate of Insurance:

Any entity can be exposed to risk when using the services of outside independent contractors, subcontractors, service providers, vendors or any other organization who may supply materials or services. The goal of any business owner or risk manager is to reduce exposures and protect their organizations financial interests. Transfer of risk to another entity through a combination of contracts and insurance is a basic method used to accomplish this protection. The insurance certificate is merely a tool used as assurance that the types and limits of insurance required are in place. But keep in mind the certificate is only an indication of insurance coverage provided. Insurance coverage is only provided by the terms and conditions found on the insurance policy, not the certificate.

The Construction Contract and Insurance Requirements:

When it comes to contractors and subcontractors the construction contract rules the day. A contracting firm hiring subcontractors will attempt to protect its financial interests by using the contract to transfer as many responsibilities concerning a job to the subcontractor as possible. While the concept of transfer is good, in practice there are may be many problems arise from this transfer.

Construction contracts not only line out the responsibilities of each party to the contract but all seem to have a specific section dedicated to insurance requirements. It's in this section where you will find requirements as to the limits of insurance required, the types of insurance required and any special treatment such as naming of additional insureds, waivers of subrogation, special coverage requirements and cancellation notification clause modifications. If you have been presented with a construction contract and asked to sign be sure to check with your attorney and insurance agent to make sure it is in your best interest to sign the contract. Be aware, many of the terms and conditions found within the construction contract may not be insurable items. Simply put, you may, by signing the contract, be agreeing to assume liabilities that far exceed those that you should. So as a word of caution, always check with your attorney and insurance agent before signing a contract!

Contractors and Workers Compensation:

From a workers compensation perspective the general rule is that all workers on a job site will be covered by workers compensation. The question becomes whose workers are they? If you are the primary or general contractor who hires a subcontractor to perform work on one of your projects you must verify the subcontractor has workers comp coverage for his employees, it's your only protection. If the subcontractor does not provide workers comp coverage then your workers comp policy will step in and provide coverage for any of the sub's injured workers. The effect is that those claims will increase your experience modification factor causing the workers compensation premium you pay to increase.

The certificate of insurance, when properly executed, provides proof that workers compensation coverage exists and that the subcontractor provides workers comp for his workers. With the certificate in your file you have protected your company from being charged at the audit for the subcontractor's workers. If you are the primary or general contractor you should always ask for a copy of the subcontractors policy. It is only on the actual policy where you can confirm that all conditions as set out in the construction contract have been met, remember the certificate only provides basic coverage information valid only on the day the certificate was produced.

What is a Valid Certificate of Insurance:

The entity seeking proof of coverage, as outlined in a construction contract, should never rely solely upon the insurance certificate as valid evidence of workers compensation coverage. Certificates are very clear and all contain a disclaimer stating "this certificate is issued as a matter of information only and confers no rights upon the certificate holder." It also states "this certificate does not amend, extend or alter the coverage afforded by the policies below." If the general contractor is requesting some form of protection under the subcontractors policy then the subcontractors policy must be modified by endorsement. This is the only way coverage can be amended. Possession of a certificate does not confer coverage and without the endorsed policy no modification requests are complete.

People do strange things when it comes to certificates. We've seen fraudulent certificates used where a contractor may have had a copy of his cert from before, whites out the dates, changes them to make them current then changes the certificate holder and presents the certificate as valid. We've heard of certificates being produced and sold on the internet. Our opinion, certificates should only come from the producing agent, agency or company. If you are using a faxed version then ask for the original for your files.

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