Archive for July, 2009

I was recently asked, what exactly is a certificate of insurance and why do I need to have one on file from my vendors?

When a customer or potential customer wants proof that your company has the appropriate level of insurance to protect your company, your employees and customers they will request proof of insurance.  The certificate of insurance is this document. 

It is generated by the insurance company or company that arranged  (insurance agent or broker) the insurance policy with the insurance company.  It shows that at the time the request was presented the policy number, coverage dates, type of coverage, and coverage limits.

The certificate is not an insurance policy nor indicate any promise to pay the certificate holder or provide any other rights to the certificate holder.  It also does not guarantee that the insurance policy will be in effect until the end of the policy noted on the form (the policy may be cancelled for a number of reasons including cancelling the policy and re-writing the policy).

The certificates are typically generated (at least in the US) on an Accord Form.  It is an industry supported organization that was chartered to standardize applications, binders, loss notices, certificates of insurance and other forms.  There are other forms that are used, and in some cases companies will publish a memorandum that outlines the types and limits of their insurance.

In addition to providing information on the types and levels of insurance, the Certificate is also a way of showing that insurance (typically commercial general and auto liability) coverage has been extended to a customer as an additional insured though for the ”additional insured” is best served with a copy of the endorsement to the insurance policy.

As I mentioned earlier,  the Certificate of Insurance (COI) is typically generated by the insurance company or insurance agent or broker.  It is important to describe to them what is being requested to

  1. Make sure the insurance policies you have in place meet the requirements
  2. Provide the specific information that is being requested

Carefully review the request and compare it to your current policies.  If the requester is asking for information that is not relevant, you may need to have a discussion with them to explain why you are unable to provide this documentation.  Additionally, the amount of coverage required may be larger than the main policy, and would be covered with umbrella coverage so this policy would need to be included in the COI. 

One of the biggest perceived benefits of the COI is the expectation that the certificate holder will be notified when a policy is cancelled or replaced.  In some of the forms wording, provides a specific amount of time (I usually saw 30 days) notice, which will allow the certificate holder the opportunity to follow up to obtain a new COI.  This condition is only as good as the follow up and follow through of the entity that issued the certificate, and my experience shows this follow through is sadly lacking.

In a September 2008 article, Towers Perrin announced the results of their sponsored survey of 125 top CFO’s which indicated that improved risk management is a top priority (See below). 

“Improved risk management is the top priority of CFOs in reaction to the current financial crisis, ahead of short- and long-term access to capital, according to a Towers Perrin survey of finance executives at major U.S. corporations

Towers Perrin commissioned the survey by CFO Research Services, an affiliate of The Economist and CFO magazine, to gain insights on how companies view the seriousness of the financial crisis for their businesses. It also sought to learn about the likely impact on the way they conduct business.

The responses came from 125 top finance executives representing a solid cross section of American industry and were collected during the week of September 22, as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke began making the rounds on Capitol Hill to pitch the administration’s $700 billion rescue plan.

Risk management practices gain greater attention among CFOs

Here are some of the findings that stand out:

  • Only 4% of respondents perceived the recent financial market meltdown as having a severe impact on their financial prospects. Although the majority acknowledged that the crisis would dampen profit expectations and leave a potentially lasting dent in the world economy, only five respondents feared a major negative impact on their financial results.
  • Nonetheless, approximately 72% of respondents expressed concern about their own companies’ risk management practices and ability to meet strategic plans. This suggests that finance executives, regardless of industry, perceive a need to invest in more effective risk identification, measurement and management procedures.
  • In a related finding, a sizable minority (42%) foresaw more energized involvement by boards of directors in risk management policies, processes and systems, and a comparable minority foresaw intensified employee-level engagement.
  • 61% expressed concern about raising short-term capital — a sobering percentage of the executives surveyed but hardly surprising given ballooning spreads in the commercial paper market.

Risk management practices on the top of the agenda for many CFOs

It is interesting that, despite the evident impact of the current financial crisis on liquidity and consumer confidence, more than half (55%) of the CFOs agree that they plan to put their risk management practices under a microscope and that this investigation will in many instances reach all levels of the organization, from the board down and from the shop floor up.

What Standard & Poor’s stated so plainly when it announced the inclusion earlier this year of an explicit ERM component in its rating of corporate securities is echoed by America’s leading finance executives: Effective risk management depends on effective risk culture — i.e., genuine awareness and control of risk throughout the organization, and genuine line-of-sight accountability.

For the full article click here