Navigating Subcontractor Certificates of Insurance: A Comprehensive Overview

What is a Certificate of Insurance for Subcontractors?

What is a subcontractor certificate of insurance? There is one overarching purpose of a subcontractor certificate of insurance: to provide another level of protection in the case of an untimely accident, injury, or property damage claim (i.e. liability policy) against a construction site or project.
In this era of shifting and expanding liability, there is an obvious need for limits on liability for contractors, subcontractors, or any suppliers participating in a construction project.
This is especially true for subcontractors, who rely heavily on certificates of insurance for proof of the insurance coverage that they require from the contractors that sub award work to them, as well as proof of proper insurance coverage for their own subcontractors .
There are many definitions and functions of subcontractor certificates of insurance. Most General Contractors insist upon their subcontractors providing certificates of insurance that indicate that they have procured not just insurance, but insurance with proper terms and coverage levels per the subcontract, agreement, or request for proposal.
Certificates of Insurance play an important role in the bid process and award of bids. It is good practice for contractors to ensure that their subcontractors have their own proper coverage in place for the protection of all parties involved.

Essential Elements of a Certificate of Insurance

There are a handful of major components commonly found in certificates of insurance (COI) that subcontractors and general contractors have to grapple with. As a point of reference, COIs are usually prepared using standard ACORD forms for both general liability and automobile insurance. You will have to cross reference with the various policies issued by the different carriers to fully ascertain the depth and breadth of coverage afforded. Here are some of those components:
Coverage Types
COIs issued in connection with general liability, automobile, builder’s risk, excess/umbrella/excess umbrella, and workers compensation coverages are the most common types issued by subcontractors. General liability and automobile COIs appear in approximately 90% of all COIs submitted.
Policy Limits
This section of the COI outlines the "maximum" amount an insurer will pay out per claim and the maximum amount it will pay over the duration of the policy period.
Additional Insured Endorsements
A common request made by general contractors is that they be added as an additional insured on a subcontractor’s general liability policy. A simple search for additional insureds in the ISO versions of the policies will reveal whether or not a general contractor will be covered. Sometimes, it is necessary to look to the policies themselves to be sure, since carriers can vary based on their language.

Reasons Contractors Demand Certificates of Insurance from Subcontractors

General contractors require certificates of insurance from subcontractors for a multitude of reasons. Primarily, certificates of insurance help mitigate the liability a general contractor faces on a project. General contractors are typically contractually obligated to defend and indemnify the owner for claims brought against the property owner by a third party. Claims from third parties may include claims for bodily injury and property damage. If a third party wins a lawsuit at trial against a general contractor with an additional insured endorsement in a subcontractor’s policy, the general contractor would oftentimes be responsible for paying the judgment or settlement amount to the third party because it is responsible to indemnify the owner. The certificate of insurance is reviewed to determine whether the general contractor is an additional insured on a subcontractor’s insurance policy. In addition, general contractors require certificates of insurance to ensure that subcontractors will be able to perform their obligations under the subcontract should a claim for bodily injury or property damage arise. General contractors also require certificates of insurance to ensure that a subcontractor will secure any required insurance during the term of the project. In the event a subcontractor is unable to satisfy its obligations pursuant to the subcontract, the general contractor may be able to hire a new subcontractor to complete the work. In such a situation, the general contractor would need to shoulder the costs of hiring the new subcontractor. If the subcontractor is insured, the general contractor may be able to recover from the subcontractor’s insurer for the general contractor’s costs to complete the subcontractor’s work. Certificates of insurance also help reduce the risk of financial loss to a general contractor on a project. When a claim is made against a subcontractor, certificates of insurance can be reviewed to determine whether the subcontractor has sufficient limits of insurance to cover the liability being asserted. For example, if a third party files a claim against a subcontractor in the amount of $1,000,000, the general contractor may be able to limit its exposure to that claimed amount if it can show that its subcontractor has $1,000,000 in coverage. If the subcontractor does not have insurance coverage for the full $1,000,000 being claimed, the general contractor would be responsible to pay the additional amount. For this reason, general contractors may be wary of subcontractors that only have low limits of insurance coverage. Certificates of insurance are requested so the general contractor can seek clarification of a subcontractor’s available coverage limits. Lastly, certificates of insurance help ensure that subcontractors comply with their contractual obligations. For instance, if the subcontractor is required to carry primary/general liability insurance during the term of the subcontract, the general contractor can rely on the certificate of insurance to show the existence of insurance coverage.

How to Secure a Subcontractor Certificate of Insurance

To obtain a subcontractor certificate of insurance, contractors must first contact their insurance agent or provider. The insurance agent will walk the contractor through all the insurance paperwork, including the paperwork needed to obtain a tenant certificate of insurance. A subcontractor certificate of insurance can be acquired before starting a job, or at the end of a job for future use. Generally, the certificate is issued by the contractor’s insurance agent on standard ACORD form #25, the Certificate of Liability Insurance. In contrast, a binder can be created by an insurance provider or broker, and it serves as temporary evidence that such insurance exists. In either case, this certificate is the document that most general contractors request.
There are dozens of credible, legitimate general liability insurance agents in the country contractors can choose from. Every state will also have a jurisdiction-managed website where consumers can freely search for licensed general liability insurance providers. A general contractor does not have to use the same insurance provider as the subcontractor and may not be recognized by all insurance agents or brokers. Contractors should shop around for the best deal in both service and cost.
A certificate of insurance must cover all the same services that the subcontractor will provide. That is, if a subcontractor, upon request, provides electrical services to a property owner, general liability insurance for the subcontractor must also cover electrical services. If the subcontractor requires all of their employees to carry worker’s compensation insurance, so too should the certificate of insurance be amended to list all names of employees and their services in the appropriate box. All insurance policies must meet the general contractor’s expectations. If a general contractor is only satisfied with contractors who provide unoccupied property insurance, then any certificate of insurance issued will also need to reflect the same.

Common Issues and Resolutions Concerning Subcontractor Insurance

Certificates of insurance for subcontractors can be a source of frustration. It is not uncommon for a subcontractor to try and pull together all of the required documents for a project only to find out that at least one or two items are either old or not correctly completed.
Unclear or missing requirements: General contractors usually have their own set of requirements for the subcontractors. The problem is these requirements vary from GC to GC and/or project to project. If a subcontractor is the subs of several GCs, it is hard to keep track of what the requirements are for each GC. Consequently, a subcontractor can work hard to obtain all of the certificates and then find out it is missing a requirement or two.
Solution: Take the time to compare the documents against the requirements and reconcile any differences. However, there are commercial certificate management systems which will produce a reconciliation report. The system requires a single copy of all requirements and the application form for the project. Every document the project team uploads to the system is checked against the requirements and a reconciliation report is produced.
Old certificate: Certificates expire (i.e. , are 180 days after the effective date of the certificate). It is not uncommon for a subcontractor to send in an old certificate to a GC. Once the GC has an old certificate it is hesitant to contact the subcontractor because it seems like the GC is nagging the subcontractor.
Solution: Send a reminder to subcontractors to submit copies of certificates at the 160 day mark. This will give the subcontractor 20 day to submit a new certificate and still meet the requirement for issuing an updated certificate.
Missing coverage: When comparing documents against the requirements, it common to find that certificates for subcontractors have missing coverages.
Solution: Ensure all of the required coverages are listed on the application form for the project. If any steps are required as part of the project to obtain certain coverages, make sure the subcontractors understand the steps and follow-up with them to confirm all of the steps are completed.
Confusing wording: All certificates contain boilerplate language. Unfortunately, this language can contradict itself making it unclear if a coverage is actually provided.
Solution: Have your legal counsel review the certificates and reconcile any problematic language.

Certificate of Insurance Use for Dispute Resolution and Litigation Facilitation

A proper certificate of insurance goes far beyond simply providing your client with peace of mind about your subcontractors and sub-subcontractors, it also can prevent any future disputes between the contractor and the subcontractor by narrowing the focus of their relationship to the terms of the contract and the certificate of insurance. This would be most clearly demonstrated in a contractual dispute since the contractor generally will know exactly what the subcontractor’s minimum insurance requirements were and will be able to determine if the subcontractor has complied with those requirements. Even if the subcontractor has not complied with the insurance requirements of the contract, the contractor will have a basis for arguing in court that the subcontractor is obligated to pay for the damages resulting from its failure to comply.
For example, in the recent case of Harbour Marine Towing, Inc., v. Antilles Steamship Corp., 2012 Civ. App. LEXIS 78 (Feb. 20, 2012) New York’s Appellate Division affirmed a maritime arbitrator’s award of $4.9 million for damage to a cargo of an oil-drilling rig off the coast of Belize. The subject certificate extended the coverage to a tug-owner’s sub-contractor’s vessel for a voyage to Belize as cargo-laden as well as for loss, loss or damage while in transit. Although the subcontractor’s tug sank in a storm rendering it unable to return or salvage the rig some 300 miles offshore Belize, the certificate remained ineffect for an additional 30 days. The insurance company argued that the liability should be limited to that attributable to the tug-owner’s vessel. The arbitrator disagreed, stating that because the insurance company was aware of the size and cargo of the barges, it would have been appropriate for it to partially insure the cargo for a period of 30 days beyond the completion of the voyage.
In most jurisdictions, the contractor/subcontractor relationship is typically created by a written contract. Whether or not the parties have actually entered into a contract is determined by considering the totality of the evidence, including whether the parties’ statements and conduct indicate that they intended to form an agreement even though they may not have executed the formal contract. If the subcontractor under the agreement here had failed to name the contractor as an additional insured, the effect of the subcontractor’s conduct could have been to replace the requirements of the agreement with what it believed to be the reasonable expectations of the parties based on the facts and circumstances. Therefore, the arbitrators conclusions concerning the parties’ intent regarding the 30-day extension were neither arbitrary, capricious, nor contrary to the weight of the evidence.
A certificate of insurance can potentially assist in other dispute resolution contexts, including negotiation, mediation, or even jury trial.

Subcontractor Insurance Coverage Trend and Requirements

Over the past decade or so, the law concerning both the enforceability and substance of standard form contracts has changed considerably. The Restatement (Third) of Property: Liens and Other Security Interests comments "It is now well established in the law of contracts that, with few exceptions, a contract is not unconscionable merely because it is unreasonably favorable to the other party." Restatement (Third) of Property: Liens and Other Security Interests, § 2.4 (2003). Thus, it has become easier for parties to add terms to their contracts and have those terms enforced, even if onerous. In particular, indemnity clauses, as discussed in our past posts on the subject Prop 1 and Prop 2, are gaining more and more acceptability. Another area where mandating insurance from subcontractors has gained traction is with respect to the number of coverages that subcontractors must provide proof of. This trend is driven by a combination of the desire for risk transfer by the general contractor and insurance companies desire to charge more for certain coverages. In the past an owner would not necessarily require a subcontractor to have pollution liability insurance or cyber insurance , but now as these types of risks have gained more importance to owners they are now being shifted to subcontractors. While these provisions may seem onerous, the fact is that many such coverages are less expensive than general liability insurance and leaving the cost of these forms of coverage on the general contractor can simply be passed on to the subcontractors can result in the same expense to the owner. Given that many of the costs associated with contracting with a property developer are fixed, and the general contractor will seek to maximize its profit margin found in the known cost of labor and materials when bidding on a contract, these additional costs are going to simply be passed on to subcontractors. While such a transfer of risk may be frustrating to a subcontractor, who may simply wish to stay in the business of avoiding such shifting of risk, the fact is that this is the current trend in the industry. As such the best thing a subcontractor can do is to factor these costs into its bids.