Thursday, January 9, 2014

Insurance Certificates

Most contracts between buyers and sellers require the seller to carry certain types and minimum amounts of insurance coverage. The question is having the insurance requirement in the contract good enough, or should you also request, keep and maintain certificates of insurance?

If all you do is require insurance coverage, if the supplier failed to maintain those coverage amounts, they would have breached the agreement and you could sue them for damages. The main reason why you require insurance is to have additional financial protection against losses and claims that is over and above what the supplier has for assets. If they don’t carry the required insurance you can only look to their assets. If the supplier went bankrupt, you would be in the same position as any unsecured creditor of the supplier and might not be able to collect anything.
You would be assuming the total loss.

An insurance certificate from a supplier’s insurance company will tell you what insurances the supplier has, the coverage amounts, and the term of coverage. Term of coverage is usually one-year increments. Requiring that you be a named or additional insured means that if there are any changes to the underlying policy that you will get notices of the changes. For multi-year contracts or projects that last more than a year you should require insurance certificates for any renewals with the existing insurer or policies with new insurers. When you get a new certificate you should continue to keep all the prior certificates. The reason for that is insurance provides protection for injuries or damages that occurs within the coverage period. An injured party has a legal period of time in which they must make a claim or they will be prevented from making a claim. That period of time is referred to as the statute of limitations. Each jurisdiction may establish their own statute of limitations and the usually vary by the type of claim. For example in New York, the statute of limitations are:
Fraud: 6 years; Libel / Slander / Defamation: 1 year; Injury to Personal Property: 3 years; Product Liability: 3 years; Contracts: 6 years; Personal Injury: 3 years; Wrongful Death: 2 years. For wrongful death claims the limitations run from the date of the death. For injury claims, the limitation runs from the date of the injury.
For contracts, the parties may agree to a shorter period of at least one year and the statute of limitations runs from the date the contract was breached.

What this means is a party filing a claim can file that claim at any time within that allowable period and that may happen well after the contract has expired or been terminated. In the interim period before filing the claim the supplier or contractor may have gone bankrupt. With respect to claims covered by insurance, the insurance company remains responsible for providing insurance on claims where the cause of action occurred during their coverage period. Their responsibility only ends when the applicable statute of limitations has expired.

For example: The insurance certificate for all perils including personal injury due to negligence has a coverage period of January 1, 2013 to December 31, 2013. A party is injured on December 20, 2013. That injured party has 3 years or until December 20, 2016 to make a claim. They make a claim on December 1, 2015. The buyer had a general indemnification in their agreement with the supplier or contractor indemnifying the buyer against injury claims based upon the supplier or contractor’s negligence. As part of the claim the Buyer is sued. If the supplier is still in existence, the Buyer invokes the indemnification. If the Supplier is no longer in existence, the buyer would need to defend against the claim and would notify the Supplier’s insurance company who had the policy during the term in which the injury occurred, of the claim and they would have the right to defend against the claim. The case comes to trial in January 2017 and the injured party is awarded US$100,000. That US$100,000 should be first paid by the insurance company, up to the limits of their policy. Any remaining amount would be paid by the supplier of they exist, any successors and assigns of the supplier if they have been acquired or merged. Lastly the buyer may need to pay if the supplier is no longer in existence in any form.

The best reason for getting and maintaining certificates of insurance is they can help you identify what insurance company was providing coverage at the point in time when the injury arose. Many things change and changes occur in a three-year period. Suppliers may no longer exist or may have been merged or acquired by other companies. Individuals involved in managing the contract may no longer be with the company. The best protection to ensure that you get the full benefits of the required insurance is make sure you have a paper or electronic trail that allows you to determine what insurance was in place at the time of the injury or loss.

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