by Collin J. Hite
It never ceases to amaze coverage lawyers the risk policyholders take by relying on certificates of insurance as the sole source of evidence that the other party to a contract has required insurance. Even riskier are those who rely upon those pieces of paper as evidence that someone is an Additional Insured. Let’s face it; your odds are better at a blackjack table.
Black’s Law Dictionary defines a certificate of insurance as a “[d]ocument evidencing fact that an insurance policy has been written and includes a statement of the coverage in the policy in general terms.” But for those wanting to be added as an Additional Insured, the certificate is almost always meaningless without the actual insurance policy being endorsed on way or the other. And that is where many a company runs into trouble.
For some reason the business community believes that certificates of insurance are ironclad proof that another entity either has the purported insurance coverage, or worse, has added the company as an Additional Insured. Many lawyers, and a number of courts, will tell you that these certificates are not worth the paper they are printed on. As one commentator noted, “the issuance of certificates is one of the more dangerous documents that float between insureds, insurers, and a myriad of third parties.” The reason for the danger is that when there is a conflict or discrepancy between a certificate and the actual policy, the latter controls. Remember, the policy can be changed without any consent from the Certificate holder.
Generally, these documents are mere evidence of the insurance coverage the policyholder has at the very moment the certificate is issued. Insurance companies almost universally do not issue these certificates and many times do not know they have been issued. If the insurance is cancelled the next day, the certificate is meaningless.
Even more dangerous are companies that rely upon these documents as proof that they have been added as an Additional Insured to another’s insurance policy. The standard ACORD form states that the certificate cannot extend or alter the coverage. The normal procedure requires the broker to submit a request to the insurer to add an entity as an Additional Insured, which then endorses the policy. Without the endorsement, your chances of being an Additional Insured are slim, regardless of what your contract may require or what the certificate may say. In short, the only safe thing is to demand to see the policy and endorsement.
There are many ways a company can prevent being a gambler through proper drafting of contracts and the requisite level of follow up. First, the entity being added as an Additional Insured should not rely upon the certificate as the sole source of evidence. You should demand to see the endorsement issued by the insurer. As the use of “Blanket Additional Insured” endorsements become more common it makes proof a lot easier to obtain from the policyholder. If the broker issues the certificate saying your company is an Additional Insured, but he fails to have the policy endorsed, it is very likely that you are not an Additional Insured and your certificate is not going to convince the insurer otherwise.
Contract language requiring an Additional Insured status should be clear. The careful company negotiates the level of insurance coverage required, includes a provision that the endorsement (or even whole policy) must be provided — not just a certificate. An ounce of prevention and some legal fees is a small price to pay to prevent a costly insurance coverage fight after the loss and your only evidence is the certificate of insurance.
Lastly, a program should be put in place for someone in your company to track certificates of insurance, or outsource that function. When your project is ongoing past the expiration date of insurance as noted on the certificate, someone needs to follow up to ensure that the insurance is renewed and your company is again added as an Additional Insured on the policy. There are plenty of lawsuits where the insurance was not renewed, no one checks, and a loss occurs. Surprise, there is no insurance available. Remember, if the broker did not have the policy endorsed the insurer will claim your company is not an Additional Insured and is a stranger to the insurance contract. There are arguments in certain instances that may allow a purported Additional Insured to also claim it is a third party beneficiary of the insurance, but such claims are difficult and limited.
Your only hope for a recovery with an improperly issued certificate may be a claim against the broker that issued the incorrect or fraudulent document if that is the case. A company may be able to bring negligence, negligent misrepresentation, and/or unfair and deceptive trade practices claims against the issuing broker. Of course, expect a fight based on the assertion that the broker did not owe your business any type of duty. Claims against a broker or agent are difficult to say the least. As noted in one leading treatise, “Only a strong and specific showing of error by an agent or broker that adversely affects one to whom a duty is owed can support a negligence claim and damages against the intermediary.” Such a situation can be avoided with proper planning, policies and follow-up to ensure the Certificate of Insurance really means what it says instead of taking a gamble.
This year the Virginia General Assembly waded into the argument to provide some measure of protection. Virginia statute §38.2-518 was enacted and became law on July 1, 2012. The new statute defines a certificate of insurance, requires certain language to be included (similar to the ACORD form disclaimer), and has several prohibitions. The Virginia Commissioner of Insurance just issued an Administrative Letter noting that the Bureau of Insurance will start enforcing the new law.
The highlights of the new statute are:
° A statutory definition of what a certificate of insurance is in Virginia. The definition states in part, “[a] document, regardless of how titled or described, that is provided to a third party and is prepared or issued by an insurer or insurance producer as a statement or summary of an insured’s property or casualty insurance coverage.”
° The new law prohibits anyone from issuing or delivering a certificate of insurance that purports to “confer any rights upon a third party beyond what the referenced” insurance policy expressly provides. In short, not only can a certificate not alter the insurance policy, but it is illegal to issue a certificate that states the third party (usually the certificate holder) has rights under the policy that are not actually in the policy.
° Many certificate holders like to have the certificate state that the insurer(s) will provide advance notice to them of cancellation or non-renewal. These provisions rarely work, and are generally unenforceable. Now the new statute prohibits a certificate from stating such a requirement, unless the notice requirement is contained in the insurance policy.
° The new law expressly prohibits anyone from demanding the certificate of insurance contain false or misleading information concerning the referenced insurance policy. The statute also prohibits anyone from issuing such a false or misleading certificate.
The new legal requirements for certificates of insurance apply to holders, policyholders, insurers, insurance producers, and to all certificate of insurance forms on “property, operations, or risks located in” Virginia. The commissioner of insurance notes in her administrative letter that the new law “extends the Bureau’s authority to ANY person involved with the issuance of a false or misleading certificate of insurance.” However, the commissioner also makes it clear that the law does not prohibit consumers from asking for broader coverage, or different terms or conditions from the insurer.
As part of the new enforcement effort, the commissioner also provides some useful advice of the type of information to collect when a consumer demands a fraudulent or misleading certificate. The information will be used in the investigation and enforcement of the new law. However, use of the preventive techniques should assist certificate holders from becoming victims without the insurance protection they sought.
Collin Hite is the leader of the Insurance Recovery team in Hirschler Fleischer’s Richmond office. He handles insurance recovery and coverage litigation nationally in the areas of business interruption, all risk, construction, business torts, products liability, directors’ and officers’ liability, employee dishonesty, intellectual property, and environmental matters.
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