Real-Life Certificates
We talked to a corporate attorney at a large, privately-held retail firm to get a real world perspective on certificates of insurance...
What Good is a Certificate of Insurance Anyway?
Having a certificate of insurance on-file can make things go much smoother in the event of an incident that results in a liability claim or suit against your company. How so?
Let's follow the typical process in the corporate office of an actual U.S. retail company:
1) The retailer's legal department receives notice of an injured customer as a result of a defective product purchased in one of their stores.
2) The corporate attorney asks risk management if a certificate of insurance is on-file indicating the product vendor's liability coverage and additional insured status for the retailer.
3) Risk Management produces just such a certificate thanks to its service contract with Periculum Services Group who has obtained the certificate, validated it (and followed-up any deficiencies), scanned it and made the document image available via the Internet.
4) The corporate attorney sends a letter to the vendor and to their liability insurance carrier, attaching a copy of the certificate. The letter indicates the nature of the claim, cites the indemnity obligation that the vendor has toward the retailer, and points out the additional insured indication. In its closing, the letter places the duty (and expense) to defend and respond to the claim on the insurance carrier right from the start.
Does it really work that well?
9 times out of 10, according to corporate counsel for this retailer, that's all there is to it. The key is to have solid indemnity and insurance requirements language in your contracts and purchase orders, and then a thorough certificate of insurance tracking and validation process.
Sounds good for retail, where it's pretty clear-cut but what if I'm not dealing with product vendors?
The same approach works like a charm for this retailer in dealing with incidents arising from its contractors who build and maintain the stores.
But our contracts and indemnity language is really all we need... isn't it?
Of course well-written indemnity provisions will establish the legal obligation for your vendor to indemnify you, but... if you haven't confirmed that your vendor is adequately insured before a claim occurs, you could end up having to sue your vendor and perhaps take a large chunk of their assets in order to fulfill their obligation. You don't want to ruin an otherwise solid vendor relationship like this do you? That's why they have insurance (or should have) and if you make it a point to confirm the insurance upfront when the relationship with your vendor is good, the chances that an incident will become a wedge between you and your vendor is greatly reduced.
In what other way can a certificate of insurance be helpful?
Think about it strictly in terms of time. Without a certificate, you may spend several days trying to track down the vendor's insurance carrier. Or worse yet, your vendor may not be in business anymore! In the meantime, the clock is ticking and you typically have about 21 days to respond to the suit to avoid default. While you dig through files and place phone calls to the vendor, you probably also assign the case to outside counsel to begin the process of responding to avoid default. That creates two problems: (1) It's expensive and (2) When you finally do find the vendor's insurance carrier, they may drag their feet knowing that you have already assigned the case to your outside counsel.
But aren't certificates just a piece of paper filled with disclaimers and not worth much from a legal perspective?
Indeed, there are disclaimers and the certificate is simply a snapshot of coverage at the time of issue. However, the reality is that they do serve a useful purpose or this pesky piece of paper would have died out years ago. It conveys information that can be most valuable and expedient at a time when million-dollar lawsuits are all too common. And doesn't it make good business sense that if you go to all the trouble to put wonderful indemnity and insurance language in your contracts that you make a consistent effort to validate compliance with that requirement. If your vendor doesn't have insurance, or is underinsured, or agrees to name you as an additional insured but doesn't do it, shouldn't you know that before something happens?
