To what extent can a certificate holder rely on a COI as “certification” that coverage is actually in place? If that’s impossible or impractical, what’s the point of certificates?
More uncertainty about certificates
What about hard-to-detect limitations on coverage?
By Joseph S. Harrington, CPCU
Jim Mahurin has seen a lot he doesn’t like in his 35 years as an insurance and risk management consultant. More to the point, he hasn’t seen enough of something he considers important: clear indications of coverage exclusions and limitations on certificates of insurance (COIs).
Mahurin worked for a major carrier and as an agent for other major carriers before establishing his own consultancy in 1984. Among other things, he is a regular contributor on insurance policy issues for the International Risk Management Institute, Inc. (IRMI).
He recently contacted Rough Notes in response to an earlier “Coverage Concerns” post about the implications of a case in Washington state where a federal district court has asked the state supreme court to consider whether an insurer is bound by an entry made by its agent in a COI.
According to Mahurin, it is not uncommon for tenants and subcontractors to learn that the insurance coverage they thought was certified on a COI was not all it appeared to be and did not meet their contractual obligations for coverage.
Mahurin says he has seen coverage gutted overtly, such as with a 23-page exclusion endorsement, or limited in subtle ways, such as through insertion of the term “non-ownership” in vehicle exclusions, or the removal of exemptions to certain exclusions.
Even in circumstances such as these, Mahurin finds that “COIs are issued as if the policies were fully compliant with typical insurance requirements in contracts and leases.”
What’s the point?
Other insurance professionals may have not experienced what Mahurin describes as often than he has, but they’ve almost certainly seen it at some point. No matter how often it happens, the core questions he raises are relevant.
The previous blog post, referenced above, described how for several years insurers and regulators have strived to establish that certificates of insurance are merely shorthand indications of coverages and coverage limits provided in the relevant policy or polices.
By bulletin, notice, or statute, states have sought to make it clear that COIs cannot amend the coverage provided in the referenced policies, cannot guarantee that those policies meet contractual insurance requirements, and do not create any rights for the certificate holder.
The intent of such directives can hardly be clearer, and it is embodied in language incorporated into standard certificates themselves. Yet the prospect of a certificate establishing coverage remains. That’s the premise of the case mentioned above.
Mahurin’s observations prompt some questions related to those in the Washington case: To what extent can a certificate holder rely on a COI as “certification” that coverage is actually in place? If that’s impossible or impractical, what’s the point of certificates?
The latter question is admittedly flippant, as certificates can and do provide critical and generally reliable indications that coverage is in place for activities to proceed. It’s hard to imagine modern commerce without them.
The second question seems less flippant when nervous insureds are told to study their policies to make sure the coverage they are required to have and think they have purchased is actually in place. Who, then, is really providing the certification?
No third-party rights
It’s fair, though unrealistic, to expect insureds to know what’s covered by their policies. They are, after all, parties to the contract and can reasonably be expected to know what they’ve contracted for. To that end, certificates are not supposed to be proxy contracts for easy reading by the parties.
Certificates rather are designed to provide information to parties outside the contract who play a vital role in the insurance market How much coverage do you think would be sold if lenders, project owners, business partners, and public bodies did not require evidence of insurance?
Yet not only do COIs create no rights for third parties, but those third parties have no independent right to inquire about what the certificate says. If there’s any duty for agents or brokers in this regard, it’s to protect the confidentiality of client information unless authorized to disclose it.
“The agent owes no duty to a certificate holder other than to issue the COI truthfully,” says Christopher J. Boggs, executive director of the “Big I” Virtual University, the educational arm of the Independent Insurance Agents and Brokers of America (IIABA).
“The COI is intended to indicate that coverage exists – that’s it,” Boggs adds. “If you are really concerned that someone know what coverage is in place, list all the forms and endorsements by name and number and tell the certificate holder that copies are available upon request.
“By doing this, an agent can accurately represent the coverage without making generalizations that may prove to be misleading or inaccurate.”
No contract guarantee
Boggs strongly cautions producers against making any indication on a certificate that the referenced policy does or does not meet insurance requirements under a contract.
“If you start telling someone in a COI that the coverage does not comply with the contract, you are actually practicing law and interpreting two contracts: the insurance contract and the contract between the two parties.”
What Boggs describes simply reflects long-standing practice in the business. Mahurin understands that, but he would like to see some sort of protocol established for carriers and producers to alert insureds and certificate holders to limitations on coverage.
“I fully understand that not all exposures or people are insurable,” he says. “My beef is the disclosure process. It’s very hard for me to read policies after 45 years’ experience. How can an uneducated buyer evaluate a policy?”
The problem is aggravated, Mahurin adds, by the proliferation of nonstandard policy forms, especially for commercial general liability policies.
“A company using the current ISO CGL form is on firm ground for the lion’s share of accounts,” he says. “Nonstandard forms are the problem, and nonstandard providers have emerged with a materially increased share of the market. Some nonstandard providers provide quality products, but not all.”
Automation to the rescue?
It may seem impossible to do what Mahurin asks when you consider all the factors involved in comparing one policy to another and ascertaining whether it meets a client’s needs as determined by a third party. Some relatively new developments may lead to progress in this area, however.
Advanced analytics, long a feature of underwriting and rating, is now incorporated into policy form management. The “Mozart” Form Composer developed by the Insurance Services Office (ISO) and the RiskGenius Platform, inspired by two claims attorneys, are the best-known automated applications for reviewing and comparing policy form provisions.
Both platforms are currently oriented to be used by carriers, but it is anticipated that agents and brokers soon will have similar capabilities to produce comparisons of policies and identify key provisions of interest to their clients. This would greatly reduce the time and effort needed to analyze policies and identify coverage limitations.
Theoretically, that should allow producers to provide more detailed and objective policy information on certificates (or in some other format), but it would not entirely solve the problems described by Mahurin.
Ultimately, the issue is not about certificates as such but about the depth of a four-party commitment—among insurer, producer, insured, and third party—to identity the extent and limitations of coverage, to stand by those representations, and to compensate the insurance parties for their effort in doing so.
