Business Contracts: Certificates of Insurance and Liability Limits

To better manage your business, you may hire outside experts or contractors to help maintain your facility or provide a service to your customers. You will enter into agreements when hiring these contractors, and you may be advised to obtain certificates of insurance. These are legal documents designed to protect your business from liability and financial harm. Let’s take a closer look.

Certificates of Insurance

A certificate of insurance is necessary when a business needs to prove that they have the correct insurance coverage and adequate insurance limits in place. This is important if a claim arises and the business is found liable while providing their service or engaged in their trade.

Think about when a snowplow contractor is hired to plow a parking lot, clear sidewalks and apply ice melt. There is an expectation that this will be done in a timely and safe fashion. But what if they hit and damage a parked car while plowing the lot? The car owner will look to the parking lot owner to pay for the damage. The lot owner will expect the snowplow contractor to pay for the damage because they caused it – it’s their fault! After an accident has already happened is NOT the time to find out that the snowplow contractor doesn’t have auto or liability insurance.

business contractWhenever a business enters into a contract or service agreement with another party, they should require that a certificate of insurance be provided before any work begins. The certificate should be for all lines of coverage including commercial general liability, commercial auto liability, workers compensation and umbrella.

Note that commercial general liability and commercial auto liability are different from personal insurance. Using snowplowing as an example, anyone can put a plow on a pickup truck and hire out to plow driveways, but do they have the necessary insurance to pay for any damage they may cause? A personal auto policy will provide coverage when the vehicle owner is plowing their own driveway, but that is typically the limit of the coverage. The personal insurance auto carrier will very likely deny any coverage for a loss caused by business use of the vehicle. If the vehicle owner advertises a snowplowing service or accepts money for snowplowing, they are now a business! If they are a business, they need business insurance. To confirm, we checked with a local personal insurance agent. Their personal auto coverage specifically excludes using the vehicle while engaged in any business. It further restricts that snowplowing cannot even be done for free for someone other than the vehicle owner.

If you hire a business or contractor that doesn’t have correct or adequate insurance coverage and they cause a loss, your business could be on the hook for any damage or injury caused!

Liability Limits

Along with the certificate of insurance is limits of liability. In other words, how much coverage does the contractor have? For the work they are doing, is it enough to pay for any loss that they may cause? Let’s say the contractor is a roofer putting on a new roof. When they are done, the roof leaks and damages computer equipment. Do they have enough coverage to pay for the damage? Or consider a delivery service hired to deliver a product. While doing so, they cause a serious motor vehicle accident. Do they have enough coverage?

How much coverage is enough? The answer can vary. Consult with your insurance agent to review the work to be done or the service to be hired and determine the limits of liability that you should ask for. One rule of thumb is:

  • Commercial general liability – limits of $1 million per occurrence and $2 million aggregate
  • Commercial auto liability – at least $1 million combined single limit
  • Property damage liability* – at least $1 million
    *When a vendor is delivery product(s) to your customers on your behalf, their certificate should show either a transportation floater or motor truck cargo coverage.
  • Umbrella – $5 million per occurrence/aggregate

Additional Insured

A certificate of insurance alone does not guarantee coverage or that the policy will remain in effect. Someone could present their auto insurance card on Monday and cancel the policy on Tuesday. Therefore, at a minimum ask to be notified when the policy is being changed or canceled. More importantly, ask to be listed as an additional insured on the contractor’s policy. When listed as an additional insured, you will be notified if the policy is canceled or lapses and it also provides a much better chance of recovery if a loss were to occur.

Other Resources

Find more information about contractual agreements here:

Certificates of insurance and liability are a complex subject. Always consult with your insurance agent and legal counsel, and even your insurance carrier, before entering into any contractual agreements.

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