Author: Chris Boggs
Contractual risk transfer (CRT) exists for one key reason, to place the financial responsibility for injury or damage on the individual or entity closest to and best able to control the results of a particular action or project. Liability insurance provides a source for financing some of what is agreed to in the contract, subject to the policy language. A certificate of insurance (COI) is nothing more than a representation, in a one-page format, of the coverage carried by a lower tier contractor.
Do not confuse or correlate the purpose or place of contractual risk transfer, insurance or a certificate of insurance. Effectually, each is subservient to the other in certain respects - and ultimately the insurance policy rules. Allow me to explain.
Subservient and Sequential Relationships
From the risk manager's perspective, the contract “sets the course," insurance responds to the contractual indemnification requirements and the certificate of insurance attests to specific protections for contractually transferred and accepted risk. To the risk manager, this is a top-down relationship, with the contract at the top and the insurance and COI falling in line. But, in fact, the relationship among these three distinct tools is a functionally circular and subservient relationship.
Upper tier contractors attempt to contractually transfer down to the lower tier as much responsibility as possible. Some of the liability (responsibility) transferred away by the upper tier triggers the lower tier's insurance to respond. Thus, the contract initially sets the course for the insurance policy – but only to a point.
Although the lower tier can contractually accept responsibility for costs and losses NOT covered by its insurance policy, the contract does not usurp the insurance policy's coverage provisions. The upper tier can attempt to transfer away anything it desires, but doing so does not require the insurance policy to respond to claims not covered by the policy.
The contractually transferred risk becomes subservient to the insurance policy's grant of coverage; making the lower tier solely responsible for paying the cost of any uninsured or uninsurable accepted risk. When the contract transfers down more risk than is insured or insurable, the lower tier can be financially ruined because there is no outside source for financing the contractually agreed to expenses. Ultimately, the lower tier is bankrupted by the contractual risk transfer provisions.
Further, the certificate of insurance is subservient to the relevant insurance policy it is “certificating." Regardless what the upper tier asks or requires be written on the COI, only what is in or attached to the policy is allowed to be included in the COI.
Upper tiers often ask agents include special wording or special provisions in the COI. If the provisions are not in the policy such special wording CANNOT be included; there are state laws supporting and enforcing this. Ultimately, it does not matter what the upper tier asks for or thinks it deserves in or from the COI, only what is included in the policy can be included on the certificate. Period!!
Likewise, agents cannot attest to anything on the COI that is not specifically in the policy. Upper tiers often ask agents to attest to coverages, policy exclusions or the lack of exclusions; the agent CANNOT do this. Doing so may violate their agency contracts and even the law in some states.
Remember, the relationship between contractual risk transfer, the insurance coverage and the certificate of insurance is a subservient and sequential one. And from an external financing source perspective, the reality is: the insurance policy rules. The policy limits which transferred risks have a source of financing and what information can be placed on the certificate of insurance. So, tell the upper tiers to stop thinking the contract has any real power to alter coverage or change what can be written on the certificate! Tell them to get over themselves. (OK, maybe be more tactful.)
Last Updated: April 27, 2018