The benefits of getting insurance certificates
QUESTION: I’ve heard it’s becoming more important to get insurance certificates from my customers, but I’m not sure I really understand what insurance I need, or if the insurance certificates I’m receiving actually cover me. I’d appreciate it if you could tell me what to look for and how to make sure I get it.
Answer: Insurance certificates have become considerably more important for a number of reasons, not least of which is the fact that as customers feel the pinch of economic inactivity driven by project closures and delays, they seek to cut costs. For example, they often try to rent fewer machines and get more out of those they do rent. Be sure to watch your hour meters. When damage or theft occurs, they tend to fight liability claims more vigorously. This is, of course, also true of their customers as well as others, including job-site workers and even bystanders, who themselves tend to be more aggressive in pursuing liability and other claims against contractors, site owners and, critically for our purposes, equipment lessors. The result is that everyone is looking for more and better means of protecting themselves and their assets from a rapidly expanding array of legal assaults. Although there are many ways to do that, four stand out from this lawyer’s perspective:
- Your company structure.
- Your contracts.
- Your insurance.
- Their insurance.
Used properly, these can create layers of protection for equipment lessors something like the layers of Kevlar in a bulletproof vest. Alone, each provides some protection, but together, they can yield enough stopping power to save you from even the worst of legal assaults.
To answer your question, we’ll address the customers’ insurance.
Why do you need a certificate of insurance (COI) from customers if you already have your own insurance?
“This is a mess.” First, remember that your own insurance has limits. If you’re like most rental operators, you might have $1 million or $2 million in liability coverage, and possibly umbrella coverage of $5 million to $10 million. You might also have coverage for loss of and damage to your own equipment — subject to a deductible, of course, that might cover actual cash value or perhaps replacement cost. So, if for example, a customer rents a skid steer, and hands the key to an untrained employee who promptly crashes it into a structural wall of a partially constructed house, causing it and the roof to collapse, severely injuring two roofers, a plumber, an electrician and a drywaller, consider the following: What is the likelihood that one or more of the injured parties will sue your customer? What is the likelihood that your customer will blame you if he can? What is the likelihood that their attorneys will advise all of them to sue you? And finally, who pays for the damage to your equipment?
For most, the answer is going to be, “I have no idea. I’m just going to turn this mess over to my insurance company and hope for the best.”
The problem with that strategy, apart from causing the equipment lessor (you) to lose sleep for the next two years while the case waits for a trial date, is that it’s impossible to tell how many millions of dollars will be claimed, whether your insurance will cover it all, how much you might have to pay if the claim exceeds your policy limits and whether your business will be able to survive after the attorneys, the insurers, the judge and/or the jury decide your fate especially if your corporate structure and/or your contracts aren’t properly maintained and intact.
There are two kinds of problems in the world — mine and not mine. Fortunately, this doesn’t necessarily have to be your problem. Perhaps the single most compelling reason for requiring your customer to maintain insurance and provide you with a COI or endorsements if you want the documents you obtain to be legally enforceable is that if you do so correctly, you can place this problem where it should be in most cases — at the feet of your customer and, to the extent your customer is insured, your customer’s insurer.
Coverages most lessors should demand. Although each case is different, certain concepts have broad enough application to be included in almost every request for insurance made of your customers:
- Commercial General Liability (CGL) coverage. This typically covers bodily injury and property damage claims made by third parties. As an equipment lessor, you typically will want to require no less than $1 million of coverage. This varies in some areas.
- Property damage and/or inland marine coverage. This is coverage for loss of and damage to your equipment, including when it is being transported and/or is in the hands of a customer/lessee.
- Workers’ compensation coverage. This is coverage maintained by your customer to cover injuries to your customer’s employees. It can be critically important because it usually serves as an exclusive remedy for their injuries — thereby making it impossible for your customers’ employees to sue you, the lessor, when they are injured in connection with the use of your rented equipment.
- Hired auto physical damage and contents insurance. This coverage is for rented vehicles and trailers, as well as their contents. Because it is often impossible to tell what contents might be placed in/on a rented trailer by your customer, damages associated with loss or damage to such contents can literally be unlimited.
- Umbrella or excess liability coverage. This is coverage for claims in excess of the basic CGL coverage previously referenced in this article. Customers often carry $5 million to $10 million of such excess coverage because it’s relatively inexpensive compared to basic CGL coverage, though insurers will generally only sell it if the customer’s basic CGL coverage exceeds certain limits, and it offers substantial additional coverage for the money.
Related provisions most lessors also should require. Again, although each case is different, certain concepts tend to apply across a wide range of circumstances. Here are a few every lessor should consider, including:
- Additional insured. Requiring the customer’s insurer to name the equipment lessor (you) as an additional insured on the policy extends the policy’s coverage to include you, meaning you have the benefits of your customer’s policy, including coverage for injuries and damages as well as the right to a legal defense against third-party claims.
- Loss payee. If the customer’s policy names you, the equipment lessor, as a loss payee, you also will have the right to receive payments for damages to your equipment directly from the customer’s insurer, rather than relying on the customer to deliver the funds after the customer receives the insurance proceeds, which never is advisable.
- Waiver of subrogation. Ordinarily, the customer’s insurer would have the right to step into the customer’s shoes — subrogate — and pursue recovery against the equipment lessor for damages the insurer was forced to pay in connection with covering the claims mentioned above. If, however, that insurer has waived subrogation against the equipment lessor, the insurer will have waived the right to do that.
- Primary and non-contributory. If the customer’s insurance is primary and non-contributory, the customer’s insurer will be required to pay up to the limits of the policy before the equipment lessor’s insurance is required to pay anything in most cases. Among other things, this can vastly reduce your loss history and result in decreased, or at least stable, premiums as well as a reduced risk of cancellation.
- Severability of interests. A severability of interests — also known as separation of insureds — provision enables one insured to sue another, which can be valuable where the equipment lessor has been named as an additional insured but still needs to bring legal action against the customer.
- Inclusions and exclusions. For obvious reasons, an equipment lessor will generally want to require customers’ policies to specifically include hired equipment and not to exclude issues such as damage due to fire, flood, overheating, overturning, overloading and/or severe weather.
- Prior notice of cancellation. Though typically useful only for longer-term rentals, a requirement that the customer’s insurer notify the equipment lessor well in advance — at least 10 days; more commonly 30 days — of cancellation of the policy can be important not only for the purpose of advising the lessor in advance that coverage may be lost before the end of the rental term, but also of possible financial issues, either with respect to the customer or the job. If insurance premiums aren’t being paid, what else isn’t being paid? At least one court has found that the insurer’s promise to provide such advance notice of cancellation is not actually legally enforceable. Most insurers, however, make it a practice to honor such promises anyway, so it pays to include the requirement whenever possible.
- Insurance certificates. Most customers who have insurance will provide a COI form created by the Association for Cooperative Operations Research and Development (ACORD), a nonprofit insurance industry organization. By far, the most common form is the ACORD 25, Certificate of Liability Insurance.
By title, ACORD 25 Certificates evidence liability coverage, not property damage, but we often see property damage or inland marine coverage referenced near the bottom of these COIs. Technically, an ACORD 23 (Vehicle or Equipment Certificate of Insurance) form might seem more appropriate for property damage coverage on equipment, but because ACORD 25 Certificates are so common, and because COIs serve only as evidence of coverage and do not, by themselves, create legally enforceable contract obligations, be prepared to hear that only an ACORD 25 Certificate is available, and just know that you will need to try to verify the above property damage requirements as well. Also, bear in mind that there is no legal requirement that only ACORD Certificates be used. While they are certainly the most common, other forms and formats of COIs can be used.
This, of course, adds additional layers of complexity, and therefore confusion, to the process, and often discourages busy equipment lessors from bothering to obtain COIs. Not doing so, however, can be an expensive, and in some cases, disastrous mistake.
Business is complicated enough; simplify what you can. For most of my clients, simply having each contractor-customer — as most readers know, homeowners almost never provide COIs — sign a separate Insurance Requirements form identifying the types and levels of insurance required and authorizing the equipment lessor to deal directly with the customer’s insurer is the only real option for handling this critically important issue quickly and easily. Include in your form a provision authorizing you to submit and settle claims on behalf of the lessee, and you can save yourself a great deal of time trying to convince your customer to cooperate with you after an event of loss has occurred — less than shockingly, such customers tend to become considerably more difficult to reach after the fact. Keeping track of COIs also can be a significant challenge. Using a certificate tracking program that automatically organizes, files and retrieves COIs can save valuable time and enable you to avoid the inevitable, “I can’t find the one COI I need” trauma when a mishap does occur.
It wasn’t raining when Noah built the ark. All of the above must be accomplished in advance. Unlike health insurance, equipment insurance does not provide coverage after the fact for pre-existing conditions. If you don’t have coverage under your customer’s insurance, or at least your customer’s agreement to provide it, before something goes wrong, demanding it later is likely to do you little good. As is so often the case in business and in law, get out in front of this, or risk getting run over by it.