This is a fairly common question, one that you may be surprised to know our own team has debated on several occasions.
Nearly every business has insurance of some kind, so why bother with all the paperwork and administrative overhead of cert tracking?
The truth is, it probably doesn't make sense for every business to track COI, but for many others tracking certificates of insurance is a critical part of their risk management strategy.
When it's done well, tracking certificates can help ensure contractual risk transfer with a minimal investment of time.
Just like insurance, certificates of insurance only matter once something bad happens.
Contractual Risk Transfer
In most cases when you hire a subcontractor, you expect them to use their skill to deliver a product or service. But what you also want to do is establish a plan for their failure.
If a contractor causes an accident, destroys property, or even if a component they install has an undetectable design flaw that causes a building to flood 5 years later, you want to make sure as part of their service, you also receive protection from their mistakes.
The best way to be sure the contractor can pay for their own mistakes is by checking that they have sufficient insurance.
The way you check that they have insurance is with a three pronged approach
- Request certificates & endorsements
- Verify coverage
- Monitor contractors' insurance over time
Your contract with the subcontractor should tie this all together, establishing that they must provide proof of insurance, specifying what kind of insurance they must have, and requiring their cooperation with your efforts to verify and monitor the insurance.
Your Own Insurance Isn't Enough
You might think “wait I already have insurance, won’t that cover any mistakes my contractors make?”, which is a fair point, but it can also put your business in a dangerous situation.
Any time one of your subcontractors causes a claim, your premium will increase.
Your yearly limits will also be diminished by each accident. If those limits are exhausted, it is as if you had no insurance. In this case it is smart to buy more insurance, but not everyone does because with multiple large claims, insurance can become extremely expensive or even unobtainable.
Indemnity Agreements Are Fragile Without Insurance
You may also say: "But the contract already requires they have insurance so they have to pay for their negligence anyway."
This isn't necessarily the case. If the business can’t afford to pay for the damage, they may declare bankruptcy.
If there is any ambiguity about who pays in the event of a claim, you will likely have to resolve the claim with a lawsuit.
In the best case scenario, the contractor has the insurance you require, and pays without complaint, but you can't rely on it working out that way.
Even if your subcontractor has insurance, wants their insurance to pay for the damage and they believe it was their fault, if you don’t check for certain endorsements (e.g. waiver of subrogation), the insurance company may sue your business, claiming that you negligently created an unsafe environment and are therefore responsible for the accident.
Planning Ahead Can Save Your Business
Certificate tracking and more generally insurance compliance tracking sets up a plan for how both you and your subcontractors are going to conduct yourselves in the event of an accident.
The goal is to remove all ambiguity about who will be held responsible for an accident.
This way, nobody gets sued, the responsible party pays their deductible, insurance covers the damage, and everyone can get back to work.
Now that we’ve established why you might want to track certificates, our next video will cover the basics of how to track certificates.