COI 101: What You Need to Know About Certificates of Insurance
Any contract represents risk, and one of the best ways to mitigate some contract risk is a certificate of insurance. COIs prove that some liabilities will be covered through the course of a project. They can provide peace of mind for both sides.
“It’s important for a business to routinely request certificates of insurance to ensure that important insurance policies are in effect,” says Tom Simeone, attorney and CPA at Simeone & Miller, LLP.
Here’s what you need to know about COIs.
What Is a COI?
A certificate of insurance is a document that confirms that an insurance policy is in place, Simeone says. The certificate will include information about the policy, such as the amount and dates of coverage and deductibles, Simeone says. Requesting and keeping COIs helps protect companies involved in certain kinds of contracts.
Doug Berman, a corporate lawyer who specializes in finance, mergers and corporate compliance, notes that COIs are not insurance contracts themselves but a summary of the coverage, and they verify that coverage exists.
How Are They Used?
Businesses require COIs under different circumstances, Simeone says. Businesses that store materials or inventory with another company, such as a warehouse or manufacturing company, may request a COI, he says. “The products or inventory may not be covered by the owner’s own insurance policy because it’s not on their site. Therefore, they require the warehouse or manufacturer to provide proof that they have coverage in case of a fire or some other casualty.”
COIs are typically used in transactions where they can be used to demonstrate insurance coverage in the due diligence process or a to demonstrate that a lender or landlord has been added as an additional insured on the policy as a condition to closing a transaction, Berman says. “Outside of a transaction, they can help in risk management for tracking scope of coverage and expiration dates so a company can quickly check if coverage is appropriate or deadlines are approaching.”
Why Are They Important?
Businesses should routinely request certificates of insurance to ensure that important insurance policies are in effect, Simeone says. “This should be done periodically — at least every year — to ensure that a policy has not been canceled and remains in effect.” In addition, owners should review the terms of the policy to ensure that it provides sufficient coverage, he says. “Failure to maintain the required coverage may be breach of a contract or lease, and a business may need to obtain sufficient coverage itself if the tenant or other company fails to do so. If it does not, it runs the risk of significant financial losses in the event of a casualty.”
Any organization that needs to track COIs should consider a strong process that provides timely reminders and notifications when it’s time to re-evaluate coverage and contracts. Software tools can provide reminders to request COIs of updated coverage when old policies expire to help manage organizational risk.
