Third-Party Insurance Basics and Understanding Insurance Documents

One often overlooked way to manage risks when working with your third-party vendors is by making sure your vendors have the necessary insurance coverage. To validate your third-party vendor’s insurance coverage, it's a common practice to ask for and review a copy of their certificate of insurance (COI), but what do you do once you’ve received the COI? To make sense of it and ensure that it's valid, it's useful to understand some basic terminology and types of policies.

Common Types of Third-Party Vendor Insurance

Commercial insurance, also known as business insurance, protects businesses from unforeseen losses during regular operations. It covers property damage, legal liability, and employee-related risks. Umbrella policies provide additional coverage. The specific type of insurance vendors need will vary based on your industry, the vendor’s industry, and the service or product the vendor will provide. 

Third-party vendors may need multiple types of insurance, including:

• General Liability: Protects against injury, damage to property, and advertising injury such as slander, libel, or copyright infringement that occurred at a third party’s business.
• Professional Liability or Errors and Omissions Insurance: Covers damage caused by negligence, malpractice, or errors by a third party that result in harm to a customer.
• Cyber Insurance: Protects against the financial impact of cyberattacks. First party and third-party liability are subcategories.
• Workers' Compensation Insurance: Covers employees who suffer from work-related injuries or illnesses. This insurance is designed to protect workers and their families from financial hardship due to medical expenses and lost wages.
• Commercial Property Insurance: Protects businesses from property damage, theft, vandalism, and other types of damage.

What to Look for in a Third-Party Vendor’s Certificate of Insurance

Once you’ve received the COI from the third-party vendor, it’s important to know what to look for in the document. Here are three best practices to follow when reviewing a vendor’s COI:

1. Make sure the COI has been sent to your organization from the vendor’s insurer. While it’s uncommon, fraud does happen, so getting the COI directly from the insurer will help validate its authenticity.
2. Look for the ACORD format. The vendor’s COI will say ACORD (Association for Cooperative Operations Research and Development) on the top of the document and in the footer. ACORD is the global standards-setting body for insurance and related financial services industries. While there are other COI formats, the ACORD format is the most widely used and is the gold standard for COIs. If the COI is not in the ACORD format, you may want to review it with your organization’s insurance provider for confirmation.
   
   From there validate that the following information is included and accurate:
   
   • The business name in the Insured Box matches your contract
   • Validate the insured address
   • The insurance agent/broker contact information 
   • The name of the insurer(s) providing coverage 
   • The type of coverage
   • The amount of coverage 
   • A policy number
   • The policy’s expiration date 
   • A description of coverage 
   • COI requester name and contact information.
   Pro Tip: Your organization must determine the types and amounts of coverage necessary. When it comes to choosing the right insurance policies for your vendors, it can be overwhelming to navigate through the many options available. The best way to approach this is to seek the help of a licensed insurance professional who can guide you in identifying the types of insurance and coverage amounts that your vendors should have.
   
   You can start by reaching out to your organization's insurance carrier, as they have a good understanding of the coverage your organization has and can help identify any gaps. It's important to note that your insurance carrier will want to minimize their exposure and ensure your organization is transferring liability to the vendors, as appropriate, to reduce potential payouts.
3. Track COI dates. Validate insurance policy effective dates and track them, noting expiration dates. COIs are valid for one year or a specific period. 

It’s important to review a vendor's COI before signing a contract and periodically thereafter when the COI is due to expire. Knowing the meaning of COI-related terms and the types of insurance that your vendors should have can help you quickly review and verify the validity. It’s good practice for your organization to be named as an additional insured in many cases. 

Still, if you have any questions regarding being named as additional insured or any other issue related to vendor insurance, you can seek assistance from your organization's licensed insurance provider. Ultimately, ensuring your vendors have the right insurance coverage can greatly benefit your organization and provide you with peace of mind.