A Smart Step to Protect Your Co-op: An Overview of Certificate of Insurance

Your cooperative may rely on working with other businesses in order to succeed. But, that can leave the cooperative exposed because it can be held legally liable for damages if contractors do not have adequate insurance coverage. Doing business with vendors, buyers, contractors/ subcontractors and suppliers can have implications on the cooperative’s own insurance coverage and pose a serious threat to the cooperative’s financial health.

To protect your cooperative, it is important for you to work with only those who are adequately insured and can prove that coverage exists. And that’s where certificates of insurance apply.

What is a Certificate of Insurance?

A certificate of insurance verifies that someone wanting to do business with you has adequate limits of insurance and that the insurance is in force and current. Certificates are usually issued by an insurance agent or broker but also may be issued directly by an insurance company. A certificate is for informational purposes only and is not an actual contract between the certificate holder and the insurance company. A certificate is not a guarantee that the policy does not contain additional exclusions/coverage. Any contractor should be able to easily obtain a certificate of insurance by contacting his or her agent or broker.

It’s Important to Make the Request

When you are making the important decision of whether or not to work with a vendor, buyer, contractor/subcontractor or supplier, obtaining a certificate of insurance can provide a level of confidence as you enter into a contract with them. A certificate of insurance contains valuable information that can help businesses avoid major losses.

Keep the certificate on file. If a policy is set to expire before a contractor’s work is completed, you should request another certificate for the renewal policy.

Make Sure to Review the Certificate

Insurance requirements will often be written into a contract, but you may also want to supply a required insurance coverage form to the contractor or other party (see “Required insurance coverage” section in the right column). Always obtain the certificate before any work is performed. Most businesses require certificates before the contractor can even set foot on their property.

After obtaining the certificate, review it for the following information:

• The name of the insured;
• The proper coverage(s) being provided;
• The required limits;
• The effective dates; and
• Your name as the certificate holder.

Required Insurance Coverage.

Before providing a service or product to you, the party with whom you are doing business must provide a certificate of insurance that names you as the certificate holder and meets the minimum requirements listed below.

Please note: If the other party either does not provide you with a certificate of insurance or if they provide one with limits lower than the requested minimums, you should discuss this with your agent before work begins.

General Liability

$1 million each occurrence/$2 million general aggregate/$2 million products completed operations aggregate; $1 million personal and advertising injury each occurrence.

Workers’ Compensation and Employers’ Liability

$500,000 bodily injury by accident, each accident;
$500,000 bodily injury by disease, each employee;
$500,000 bodily injury by disease, policy limit.

Auto

$1 million CSL (combined single limits).

Umbrella liability

$1 million each occurrence.

For an explanation of how these limits would be applied in the event of an actual loss, consult with your agent.

What You Can Learn from a Certificate.

Most certificates of insurance are issued on an ACORD 25 form, a standard form used by the insurance industry. Here’s a brief description of each section of the form with a sample to review (below):

Identification Section

This section identifies the agent/broker, the insured and the insurance company providing coverage.

1 The date the certificate was issued by the agent/broker or insurance company.

2 The name of the insurance agent/broker. Their address, contact name and phone number should be listed in case you need to ask additional questions or confirm coverage.

3 The name of the insured. Be sure to verify that it is an exact match to the name of the person or company you are hiring.

4 The names of insurers. One insurer often provides insurance for all coverages, but at times, different insurers are used for different policies.

Coverage Section

This section lists the names of the insurers by coverage provided. Make sure the insurers meet your minimum requirements for financial strength and are reputable carriers.

5 The insurer for a particular coverage, keyed to the corresponding letter in item #4.

6 The type of coverage. Ensure that the person or company you are hiring has, at a minimum, general liability and workers’ compensation insurance.

7 Additional insured column.Verify that a “Y” appears to indicate you have been added as an additional insured for ongoing and products/completed operations. Best practice is to ask for copies of the additional insured endorsement to ensure that coverage complies with your insurance requirements.

8 The policy number. Identifies the number of the policy in force between the policy effective date and expiration date listed in the next two columns on the form.

9 The policy coverage dates. Check these to ensure they cover the period in which work will be performed. If a policy is set to expire before the job is completed, request another certificate for the renewal policy.

10 Coverage limits. Make sure the limits held by the contractor meet the limits you require.

11 Description of operations/locations/vehicles. Make sure you understand the meaning of any comments made here and how they may impact your project’s insurance program. Certificate Holder Section

12 Identification of certificate holder. Make sure your company’s name appears here.

13 Notification procedures if the policy is canceled. Ask to see the policy provisions or endorsements regarding how notice will be given, to whom, and how many days advance notice will be provided. Make sure they meet your contract requirements.

14 Signature of authorized representative. Make sure the certificate is signed here by the agent or other individual representing the person or company you are hiring.

Editor’s Note: When requesting the certificate, you should require that the cooperative be named as an additional insured. Neither this article nor NAHC proposes to give legal advice. Thus, the cooperative should consult with an attorney.

Reprinted with permission from Nationwide Insurance.

Weak Insurance Coverage Could Expose Boards

By Michael S. Hale, Esq.

Purchasing insurance is indeed a complicated endeavor. All policies differ in their terms and conditions, and it is critical that the board spend quality time every year in assessing the cooperative’s coverages and getting the input of qualified advisors.

While many board members believe that the cooperative’s directors and officers liability insurance would cover them if there was a claim for inadequate insurance, this may very well not be the case.

The purpose of this article is to examine common insurance issues found in reviewing cooperative insurance programs and to make some general recommendations to boards on these important issues.

Cooperative Policy Contracts, Not Commodities

Insurance is one of the few industries where the product (i.e. the policy) is almost always purchased sight unseen with the actual policy contracts coming weeks or even months after buying them. This practice is a travesty that has hurt more businesses than can be imagined. Adding to the problem, many business attorneys, including those who specialize in cooperative law, may not have a good handle on insurance coverages and options and may, in fact, shy away from advising you in this area. Yet, when you think about it, one of the most important risk management measures a business can take is to transfer the risk of loss to an insurer so understanding the coverages is critical.

Think about this. How often would an executive enter into a lease agreement without checking with their legal counsel? What about a construction agreement or a purchase agreement? How about a land contract or equipment rental agreement? Most businesses engage their attorneys before signing such contracts. Insurance policies should be treated much the same way, but this is usually not the case.

The insurance buying process is one of the most serious tasks that a board can undertake.

As a board member, you should:

– Read your current cooperative business insurance policies. Get copies for yourself. You always want to be able to say as a board member that you made an attempt at reading these important policy contracts. However, even where policyholders do read their policies, they usually do not understand what they are reading or the options available to address the gaps so recognize that there are technical aspects of the policies that you most likely DO NOT understand. Check with your agent for further direction.

– Recommend the formation of an insurance buying subcommittee that can spend quality time understanding the cooperative’s policies and what is not covered.

– Avoid supporting a process of regular “bidding” of the cooperative’s insurance. Bidding implies that a commodity is being purchased and looks to which vendor has the lowest price. The lowest insurance premiums do not necessarily mean that the coverages are what are needed to properly protect the cooperative.

– Perform due diligence. Interview and hire insurance agents before agreeing to buy insurance from them. Evaluate their proposal based on the expertise and advice being offered. A cooperative is usually not served well by an agent who is a mere order-taker. Ask questions of insurance agents quoting on the insurance, including the following:

• How many cooperatives do you insure?
• Do you represent specific insurance companies that specialize in insuring cooperatives?
• What is the commission your agency would earn on this?
• What other related services do you include such as loss control and claims handling? • How does the cooperative’s current program differ from the one you are proposing? [Note: If the agent has not asked for a copy of the current policies, this is a major “red-flag.”]

– Ask for specimen copies of insurance policies being proposed.

– Consider recommending to the board that it hire an expert consultant or insurance attorney to review proposals and advise you of the price and coverages. Some of the things a good insurance coverage attorney or consultant does include:

• Analysis of cooperative’s insurance policies in relation to how they cover the exposures of the business and what critical gaps exist;
• Review of contracts as to how the exposures presented might or might not be covered by insurance policies;
• Drafting insurance requirements and waiver of subrogation provisions;
• Reviewing and comparing insurance coverage proposals offered by competing insurance agencies and advising the cooperative board on what it is buying; • Interviewing and making recommendations on insurance agencies;
• Working with the cooperative’s existing law firm on coverages.

Covered by D & O Policies:

While board members might think that any liability, he or she may have resulting from an insurance decision would be covered by the cooperative’s Directors & Officers (D & O) policy, this may not be the case. Many D & O policies contain an exclusion for decisions related to insurance coverages. If this is the case on your D & O policy, it would place an even greater emphasis on properly managing the insurance process and getting the right advice.

Other Suggestions

A checklist can be used to look for critical coverages.

1] Determine if the property insurance of the cooperative contains a dangerous coinsurance penalty provision that could make the cooperative a “co-insurer” of the loss with the insurer. Ask this question of your insurance agent. If the answer is “yes,” it may be time for a new agent.
2] One of the most common under-insured losses is in the area of having inadequate limits of insurance to replace a building following a fire or other covered cause of loss. How do you know if the selected limit is adequate? Especially in current times with building costs on the rise, this is a more important consideration than ever.
3] If you had to rebuild in a more expensive way to comply with current ordinances or laws, would you be properly covered? Look for what limit of insurance you have.

An Insurance Attorney’s Top Tips in Buying Insurance

  1. Before anything, assure that you have a competent and qualified insurance agent who is more than an “order-taker.” Sometimes, the insurance agent can be even more important than the insurer.
  2. Where necessary, consult with or retain outside experts to advise on the integrity of the business insurance program and to provide options to you. Insurance coverage counsel can be of assistance.
  3. All policies differ – some significantly – from each other. Don’t look at insurance as a commodity.
  4. Use checklists when evaluating competing proposals.
  5. Look carefully at D & O policies to see how the board is protected.