Certificates of Insurance: A Risky Business for Additional Insureds?

November 1, 2010

The response to the firm’s last insurance alert addressing use of Certificates of Insurance has been overwhelming: calls from clients; calls from colleagues; very high readership through Mondaq; cross publication on Law360.com; and quite a discussion on LinkedIn. It is clear this is a hot topic for businesses and that additional information for readers is needed. This alert follows up on the overall premise of the last – relying solely on certificates is a risky business.

Dangers on Over Reliance of Certificates

As a reminder, 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 or a policy term allowing blanket additions when required by a contract (“blanket additional insured endorsement”). And that is where many companies run 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. This is particularly true when the “blanket additional insured endorsement” is used. Insurance brokers issue the certificates. 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.

From Risky Business to an Academy Award-Winning Business Practice

A company can prevent risky business many ways 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. If the broker issues the certificate saying your company is an additional insured, but the broker 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, and does not try to claim additional insured status for insurance that will not truly cover them. 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.
  • Asking for a broker to use an outdated ACORD form or altering the terms on the currently approved forms can only lead to trouble in the long run. In September 2009, ACORD changed the ACORD 24 and 25 forms, and altered the remainder in December 2009. According to commentator Bill Wilson, the changes came about from insurance regulators taking the position that “notice of cancellation is a policy right, not a voluntary service, and should be governed by the policy. Only filed forms can grant policy rights, not certificates.” Wishing for advance notice of cancellation and trying to now demand it on the certificate is not going to happen from the careful broker, in light of the new changes on the ACORD forms. Require the opposite party to the contract to provide notice of cancellation or changes in the insurance, because in all likelihood, you are not going to receive it from the insurer or agent.

Proof of this new change is evident from an October 2010 release from MARSH:

Effective Oct. 1, 2010, Marsh transitioned to the new ACORD Certificate forms 24 (2009/09) and 25 (2009/09): the most significant change to these documents is the change in the cancellation language. All Marsh renewals that require certificate issuance and all in force certificates will be converted to the new ACORD forms, in compliance with state regulations.

The intent of the new cancellation language is to affirm that any cancellation notice is governed by the terms and conditions of the insurance policy, and that notice of cancellation (NOC) is not granted via a certificate of insurance. This clause now reinforces the cancellation notice provisions detailed in the policy.

It is critical that companies understand the new ACORD forms and how to properly incorporate them into their insurance program.

  • Watch out for how your contract requirements will interact with the insurance policies. As Bill Wilson, from a November 2009 article, highlights: “One of the most common requests made when additional insured status is requested on a GCL policy is that the certificate of insurance includes a statement from the agent that such coverage is provided on a ‘primary and noncontributory’ basis. The problem with complying with this request is that it is the additional insured’s CGL policy that governs whether insurance is primary and noncontributory. Therefore, the downstream party’s agent cannot make such a statement without knowing what the additional insured’s CGL policy says . . . which is almost never the case.” Furthermore, do not use outdated insurance terminology in your contracts addressing insurance requirements between the parties. As Wilson further notes, “Current ISO additional insured endorsements don’t cover sole negligence of the additional insured, yet contracts are still being used that demand this, even in states where prohibited by anti-indemnity laws.”
  • 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, no insurance is available.

It is critical for companies to be aware that case law interpreting the use of Certificates of Insurance, particularly outside of automobile insurance, is few and far between. This increases the risk for businesses that make it their practice to routinely rely on the certificate as the sole evidence of insurance in place, the scope of coverage, notice of cancellation, and additional insured status. In short, it is risky business relying on such certificates without implementing the proper procedures for contracting and then follow-up.

For more information on this issue and how McGuireWoods assists policyholders in protecting and recovering their insurance rights, please contact the author.