Connecting the Dots Between Contractual Risk Transfer, Insurance and Certificates of Insurance

A Guest Contribution from Christopher J. Boggs of Big I Virtual University

Connecting The Dots Guest Blog.pngUnderstanding the relationship of contractual risk transfer to insurance and COIs takes a bit of concentration. The Executive Director of the Independent Insurance Agents and Brokers of America puts it all together.

myCOI is thrilled to introduce Christopher J. Boggs as our guest contributor for the month of September. As the Executive Director of the Independent Insurance Agents and Brokers of America (Big “I”) Virtual University and the author of 13 insurance and risk management books, Boggs is a foremost authority on insurance and its role in risk management. With his extensive knowledge and passion for educating, Boggs has made it his mission to help agents and their insureds navigate the increasingly complicated world of contractual risk transfer. To learn more about Christopher J. Boggs and Big I Virtual University, please visit http://www.independentagent.com/Education/VU/Pages/faculty-bios/coverage-experts/Chris-Boggs.aspx.

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 (CRT), insurance or a COI. Effectually, each is subservient to the other in certain respects and ultimately the insurance policy rules. Allow me to explain in the following paragraphs.

Subservient and Sequential Relationships

From the risk manager’s perspective, the contract “sets the course,” insurance responds to the contract 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 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.

Contractual Risk Transfer Becomes Subservient

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 the 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 loss. 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 to 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 that support 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 COI is a subservient and sequential one. And from an external financing source perspective, the reality is this: 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. The best risk management approach includes losing the mindset that the contract has any real power to alter coverage or change what can be written on the certificate and to recognize the exposures that exist from transferred risks that cannot be included in policy coverage.

Ready to Learn More About Contractual Risk Transfer?

myCOI is a cloud-based software solution that exists to assist in the critical tasks of managing certificates of insurance and confirming that coverage is in line with contractual requirements. Our unique program puts our team of insurance professionals in direct communication with vendors’ agents to alleviate the compliance headache for upper and lower tier contractors. When it comes to walking the fine line of confirming optimal coverage is in place without asking for the impossible and potentially hurting a valued vendor relationship, myCOI has an answer that is built on a foundation of insurance knowledge.

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