An Explanation of a Certificate of Liability Insurance
If no one has ever requested that your business provide a certificate of liability insurance before, you may wonder what it is and whether there is a risk or cost to your business for providing one. Certificates are common when two or more businesses work together on a joint project and need to verify the insurance coverage that the other carries in the event of a loss.
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Purpose
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A certificate of liability insurance is not an insurance policy or contract, and therefore carries no legal weight. It is simply an informational document used to outline certain information about an existing insurance policy. When two businesses work together, they often have a mutual interest in making sure that each has enough insurance to properly cover potential losses. For example, a banquet hall might request certificates from any caterers working in the hall in order to protect itself from losses that the caterers cause.
Included Information
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Most insurers use the standard Association for Cooperative Operations Research and Development, or ACORD, certificate of liability, and simply provide the requested information in the appropriate places. The ACORD form is designed to include the most pertinent information about a given policy, including the names of the insurers, agents and policyholders, the types of insurance in force, policy numbers, effective and expiration dates, and the limits of each type of coverage. If you must include any additional information, such as policy exclusions or endorsements, there is a space near the bottom of the form for you to provide this.
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Certificate Holders versus Additional Insureds
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A certificate holder is a person or business that requests a certificate from someone else. Using the example of the banquet hall, the hall would be the certificate holder for the caterer's policy. A certificate holder has no legal rights under the policies listed on the certificate, and cannot make a claim or collect any settlement from the insurer. By contrast, an additional insured is an entity that is included on the policy itself through an endorsement. The banquet hall may request that it be listed as an additional insured on the caterer's policy so it can collect benefits if necessary. Some insurers charge a fee or extra premiums to endorse additional insureds.
Problems
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Often, the agency that sold the policy is the one that creates the certificate, rather than the insurer itself. This poses certain problems. The person at the agency may, knowingly or ignorantly, misrepresent the terms of the policy on the certificate. Thus, a policy that provides $500,000 of coverage may appear to have a $1 million limit. Similarly, a certificate holder may be listed as an additional insured on the certificate but not actually be included on the policy, and therefore have no legal rights. Certificates are useful tools, but they do not change the underlying policies themselves even if they contain the wrong information.
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