By Paul V. Profeta
We all have work done on our buildings. Many of us require that the Contractor provide proof of insurance in order to protect us from any liability that could occur due to their negligence or imperfections in their work. Often, we are handed an Insurance Certificate with our name written in the bottom left-hand corner in the “Certificate Holder” box. We have no idea how to read or interpret the Certificate and we “think/hope” we are protected. Unfortunately, in many cases we are not. Insurance certificates are byzantine documents that I think have been designed to confuse more than elucidate. What follows here is a simple lesson about the ABC’s of Insurance Certificates. What I have tried to do is describe each section and the information that you should be looking for and requiring.
In the interest of full transparency, I am not qualified and have no special training or certification for giving you this advice (other than the “School of Hard Knocks”). I have never been an insurance broker and I have never worked for an underwriter. I have been a commercial landlord for over 40 years looking at insurance certificates on an almost daily basis trying to ascertain whether or not I am being protected.
Below is a Certificate of Liability Insurance. I filled out parts of it for your edification.
1. Let’s go to the opening paragraph that is labeled #1, which states: “This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies below. This certificate of insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder.”
What this is basically saying is you cannot rely on this Certificate for anything. The only way to be absolutely 100% certain of a Contractor’s insurance coverage is to review the actual insurance policies, which takes months to obtain from the underwriter and is impractical. It is unfortunate that this statement is put there because everybody does rely on these Insurance Certificates to be an accurate indication of the insurance being held by the Contractor. If it turns out that this Insurance Certificate has been filled out inaccurately or even fraudulently, then the insurance broker who filled it out becomes liable and you will have to hope that he or she has sufficient Errors and Omissions Insurance.
2. The second passage, which is labeled #2, is important to read and in fact even states so.
a. “IMPORTANT: If the Certificate Holder is an ADDITIONAL INSURED, the policy(ies) must have ADDITIONAL INSURED provisions or be endorsed (another way of saying “Added”) specifically on to the policy of the contractor. If SUBROGATION IS WAIVED, subject to the terms and conditions of the policy, certain policies may require an endorsement. A statement on this certificate does not confer any rights to the certificate holder in lieu of such endorsement(s).”
Basically, what that is saying is that if the Additional Insured is the same party as the Certificate Holder then there is no insurance for that party unless you have those provisions properly endorsed.
With regard to subrogation, the insurance policy follows the written agreement between the parties, who in this case are the Owner (Additional Insured and Certificate Holder) and Subcontractor (Named Insured). Typically, there is a mutual Waiver of Subrogation between the parties as part of the written agreement that states that, provided the written agreement is executed prior to any covered loss, each party will waive their rights to recover their insurance claim against the other party. It is recommended that the Waiver of Subrogation apply for claims brought by the Contractor against the Owner. The Owner should always insist that the Owner have the right to Subrogate against the Contractor. The insurance carriers will be guided by that provision of the written agreement between the parties. This results in the inability of the Subcontractor’s insurance carrier to bring legal action for the alleged negligence of the Owner (Additional Insured and Certificate Holder) that may have resulted in a claim.
b. Here is how you solve that conundrum. If you look down to one of the boxes at the bottom that is entitled “Description of Operations/Locations/Vehicles,” you can see that we have had the broker state in that box that: “Certificate Holder is included as Additional Insured as their interest may appear under Endorsement #CG 2010 (04/13) & CG 2037(04/13) or their equivalent.” That statement or endorsement allows the same party to be both Certificate Holder and Additional Insured and have coverage.
3. Producer: This should be the name of the agent writing the policy.
4. Name of the Contractor: This is obvious also. The broker will type in the name of the Contractor doing the work.
5. The top box over to the right will have all of the contact information for the broker.
6. The box under that has Insurer A, then Insurer B, and so on. Now look to the left column below entitled “INSR LTR” and you will see the same letters that are typed next to the various policies that are being described by this certificate. If there is an “A” to the left of the “Commercial General Liability” policy then the insurer of that policy will be the insurer that is typed to the right of “Insurer A” in the box on the upper right. This also is true for the Automobile Liability, the Umbrella, etc. This way you can tell who the insurer is for every policy described on this insurance certificate.
Each insurance carrier should have an A.M. Best Credit rating of A-VII or above. You can get these credit ratings from A.M. Best online by going to www.ambest.com. It is critical you research the credit rating, especially for liability coverages. Great insurance coverage from an underwriter with weak credit could be no coverage. You can find the financial size categories at: www.ambest.com/ratings/fsc/default.asp. You can review the financial strength ratings at: www.ambest.com/ratings/guide.pdf.
7. The Commercial General Liability segment of the policy is clearly the most important part. That provides what we are trying to protect against — liability. The first two boxes are “Claims Made” and “Occur.” You want to check “Occur.” This means that you can make a claim as of the date of the loss. It also means that your rights to make that claim last forever. If, on the other hand, you checked “Claims Made” you can be covered even if you make a claim 1, 2 or even 3 years after the occurrence of the claim, but this policy has to still be in full force and effect. If for any reason the Contractor let the policy lapse or if the Contractor signed insurance with a different insurance company, then you are no longer protected under the “Claims Made” box. For this reason, as an Owner you should never accept “Claims Made” and insist that the “Occur” box be checked.
8. Underneath the “Claims Made” and “Occur” boxes you will see the title “General Aggregate Limit Applies Per” with four boxes underneath them. Those boxes are labeled “Policy,” “Project,” “LOC” and “Other.” For our purposes you want the “Project” box checked. Let me explain why this is important. If you have the “Policy” box checked and if the Contractor has $1.0M of coverage and if the Contractor already has over $1.0M worth of claims in that policy year when he gives you this Certificate, you are going to have no coverage if you make a claim thereafter. I know that is disturbing to some of you but that is the fact. If you have the “Policy” box checked then you do not have insurance if the limit has been exhausted. However, if you have the “Project” box checked then all of the insurance coverage is intact and allocated to satisfy all of your claims on your “Project” when your work begins.
9. To the right of the Commercial General Liability are abbreviations of “Additional Insured” and “Subrogation Waived.” We are only going to focus on the “Additional Insured” column. You want that checked with an X there so it is clear that there is an Additional Insured that is being protected by this policy.
10. To the right of the Commercial General Liability policy there are six entries:
a. Each Occurrence
“Each Occurrence” is just what it means. In this case, using the limits of this Certificate you have up to a limit of $1.0M for each occurrence. Remember, if you also have the “Project” box checked then you have $1.0M of coverage for anything happening with regard to your project. If you have the “Policy” box checked then that $1.0M can be exhausted by claims from other projects, if they occurred before your claim.
Here is the good news. The legal costs to defend your claim are not part of the limit. In other words, if there was a claim for $900,000 that the insurer pays and the legal costs grow to $500,000, even though the total of those two numbers is $1.4M, the insurer will pay the $900,000 under the Each Occurrence provision and all of the defense costs also. Defense costs are unlimited and the insurer will pay those.
b. Damage to Rented Premises (Each Occurrence):
The fire damage coverage that is provided under Damage To Premises Rented To You applies only if you are legally liable for the damage. That is, the fire damage to your rented (or occupied) premises must have been caused by your negligence. Damage To Premises Rented To You does not cover damage that is not your fault. For example, suppose that you have rented office space in a building under a five-year lease. Late one night, a violent thunderstorm breaks out. Lightning strikes the building and causes a fire in your office space. Lightning is not caused by your negligence and therefore, you are not legally liable. Thus, your policy will not cover any demand against you to pay for the fire damage. To comprehend Damage To Premises Rented To You coverage, you must understand the meaning of the word premises. In legal parlance, premises means land and any buildings or structures that are attached to the land. Leased premises may be a building or a portion thereof. Many small businesses rent one section of a building rather than the entire structure. Whether you rent an entire building or only a portion of it, the physical address of your rental property should be listed in the declarations portion of your liability policy.
c. Med Exp (Any one person):
This is just a courtesy provision. If somebody falls on the property, rips their pants and scrapes their knee and really just wants a small stipend to pay for new pants and some medical expenses then that would come out of this $5,000.
d. Personal & Advertising Injury:
This basically covers any damage from slander or libelous conduct of the Contractor about you in addition to invasion of privacy, false imprisonment and wrongful eviction.
e. General Aggregate:
This is very critical. Your liability is $1.0M for each occurrence. And under this policy you can have two such occurrences or a total of $2.0M. You could also have four $500,000 claims or twenty $100,000 claims. These all pertain to the policy year. They do not carry over to the following year.
f. Products – Completed/Operations Aggregate:
If a product that the Contractor has installed (let’s say he put a new roof on your building) and let’s say that the defectiveness of that roof led to it caving in and causing bodily injury to somebody, then this part of the policy would cover injury liability. It does not cover replacement of the roof. It just covers the third-party liability that the defectiveness of the roof created.
11. Auto Liability – The auto liability is important. Contractors drive vehicles onto our property. Those vehicles can cause damage. You want to be insured. You can see that there are several boxes:
a. Any Auto Owned
b. Hired Autos Only
c. Non-Owned Autos Only
You want the “Any Auto Owned” box checked but you also want the “Hired Autos Only” box checked (in case the Contractor is leasing the vehicle), and you also want the “Non-Owned Autos Only” checked in case the Contractor is driving his wife’s vehicle or a friend’s vehicle. With all those checked you are covered no matter what vehicle is driven on your property.
12. You want the “Additional Insured” column to the right of the Automobile Liability checked also.
13. Umbrella Liability – First of all this again allows you to choose between “Occur” and “Claims Made.” You want the “Occur” checked for the same reason as described in #7 above. Once again you want the “Additional Insured” box just to the right of the Umbrella Box checked.
Over to the right are the limits for the Umbrella. You can see the way we filled this out that Each Occurrence has a limit of $4.0M. What that means is that you add the $4.0M to the “Each Occurrence” limit under the Commercial General Liability policy and you have a total of $5.0M coverage. Underneath that in the Umbrella section you see “Aggregate.” Your Aggregate limit is $4.0 million on the Umbrella. This means that the most the combination of the General Liability ($2.0 million Aggregate) and the Umbrella policy would pay in any policy year from all claims would be $6.0 million.
14. Workers’ Compensation – This is statutory coverage but there are some choices to be made. It is the law in New Jersey that a Contractor has to cover his workers with Workers’ Comp. Depending on the Contractor’s legal structure, the Contractor does have the choice to opt out of Workers’ Compensation coverage on himself (if he is an owner or executive officer). It is not the law that he has to cover himself. If this occurs and that Contractor gets hurt, he can sue you, as the Workers’ Compensation courts could rule that the contractor was under your direction and control while performing his operations at your property. In short, it is quite possible that the court could rule that they are a de facto “employee.” I know that sounds absurd but that is how our court system is treating these occurrences in a very “Blue” state. Those kinds of judgements have been rendered in favor of Contractors who have gotten hurt on jobs where they refuse to pay for their own Workers’ Comp. and then sued the Owner because they were an “employee” of the Owner. In order to protect yourself you want to put an “N” in the box. That box says that: “Any Proprietor/Partner/Executive Officer/Member Excluded? You want to say “NO” to that. You do not want anyone excluded including the Contractor. You want everybody covered by the Workers’ Comp.
15. For the coverage limits of Workers’ Comp., you want to check the “Per Statute” box. This gives you the maximums allowed by the state Worker’s Compensation Laws.
16. Below is a box entitled “Description of Operations/Locations/Vehicles.” This is the box that you basically write in any memos, modifications or endorsements. You can see that what I have written in here for you is something you need. It has to say “CERTIFICATE HOLDER IS INCLUDED AS ADDITIONAL INSURED AS THEIR INTEREST MAY APPEAR UNDER ENDORSEMENT #CG2010 (04/13) & CG2037 (04/13) OR THEIR EQUIVALENT. COVERAGE IS PRIMARY AND NON-CONTRIBUTORY UNDER THE COMMERCIAL GENERAL LIABILITY POLICY.” The CG 2010 provides Additional Insured status for any ongoing operations and the CG 2037 provides Additional Insured status AFTER the subcontractor has left the premises and the work has been completed.
17. The Certificate Holder box should show your name or the entity that owns the property the contractor is working on.
Paul V. Profeta is the publisher of Real Estate NJ and the president of Paul V. Profeta & Associates Inc., a Roseland-based commercial real estate investment firm.
