By Donald S. Malecki, CPCU

Standard certificates of insurance have been in use since 1976. This was when the organization then known as Agency Company Organization for Research and Development (ACORD) introduced the first standard insurance certificate. Because the certificate has been in use for more than 25 years, it is probably safe to say that most people employed in the insurance and risk management industries understand its purpose.

Briefly, the certificate is the leading method for verifying certain information about one or more insurance policies, as of the date the certificate is issued. Every once in a while certificates are updated by ACORD with additional types of information. In general, certificates inform those who read them--as well as their recipients (certificate holders)--of the type of coverage provided, (e.g., general liability, automobile liability, garage liability), the policy number, its inception and expiration dates, limits applicable, and what insurer is providing the coverage.

Probably the safest method for verifying insurance coverages would be to obtain a certified copy of the policy. However, insureds who must provide proof of insurance often are reluctant to relinquish their policies to strangers. Even if they are not opposed to having a certified copy issued, it might take months to get one, considering how long it takes to get polices issued these days. The delay would likely defeat the very purpose for requesting a certified copy. That is the reason the certificate is so popular, particularly since the authorized representative includes the agent of record.

Evidence of property coverage

Information about property insurance can be verified through the issuance of a separate ACORD document referred to as Evidence of Property Insurance Form. Sometimes the ACORD certificate used for verifying various liability coverages is used to verify property coverages, instead of the ACORD Evidence of Insurance. This often is done to save time.

It is not recommended that those issuing certificates do this because the Evidence of Insurance provides important information about property coverages that is not always inserted into the certificate of insurance, as well as information that the authorized representative completing the form needs to know.

For example, the Evidence of Property Insurance Form lists the appropriate causes of loss form applicable, i.e., basic, broad, or special forms; the applicable deductible and the amount of insurance. It also reserves space for identifying any applicable mortgagee, loss payee, or any other interest who needs to be added. Many people requesting proof of property insurance would want this type of information.

It also enables those issuing this form to acquire this information if they don't already have it. It is not unheard of, for example, for a property policy to be issued without listing the financial institution as the mortgagee, and to be discovered at the time when evidence of coverage is being requested.

The Evidence of Property Insurance Form, unlike the usual certificate of insurance used to verify liability coverages, stipulates in no uncertain terms that should the policy be terminated, the insurer will give the additional interest identified in the certificate written notice. The insurer also will notify these parties of any changes that would affect that interest.

The reason the Evidence of Property Insurance Form is more definitive in providing notice than the certificate for liability coverages is that the insurer is likely to have a better handle on who the additional interests are. With many insurers now issuing blanket, automatic additional insured endorsements, it would be next to impossible for insurers to determine precisely who the additional insureds might be. In addition, certificates are issued in "bundles," and often are shoved into drawers--or lost--and are not reviewed unless a problem arises.

Caveats of certificates

Considering how long certificates of insurance have been in use, one would think that the preamble of the standard ACORD certificate would be understood by now. In effect, it states that it is for informational purposes only, and that it does not amend, extend or alter the coverage afforded by the policies listed. Nevertheless, arguments over certificates persist.

One of the common areas of dispute has to do with notice of cancellation. The standard certificate states that if any of the described policies is canceled before the expiration date, the issuing company will endeavor to mail a 30-day written notice to the certificate holder. However, any failure to do so will not impose any obligation or liability on the company, its agents or representatives.

Sometimes the certificate of insurance is amended to substitute the 30-day written notice with 60 or 90 days, the notice is extended to encompass material changes, and the word "endeavor" is crossed out.

Amendments made to the certificate do not matter if the policy is not amended. The reason, as stated above, is that the certificate does not amend, extend or alter the coverage afforded by the policies listed. It is what the policy says that is crucial here, and, in terms of notice, it is only the first named insured that gets notice from the insurer under standard liability forms, and no one else!

However, sometimes certificate holders will take their arguments to court, maintaining that the certificate was the only document on which they could rely and, in fact, did rely to their detriment. Despite the certificate's preamble, it is not unheard of for some certificate holders to win their arguments.

The latest such dispute was the case of Kotlar v. Hartford Fire Insurance Co., et al., 100 Cal. Rptr. 2d 246 (2000), which involved a landlord and tenant relationship. The tenant agreed to add the landlord as an additional insured to its CGL policy and to also show proof through the issuance of an insurance certificate.

The tenant's policy was later canceled for nonpayment of premium, but notice was not sent to the landlord. In fact, the landlord did not learn of the cancellation until after someone had fallen on its premises and filed suit against it. The tenant's insurer maintained it was not required to notify the landlord either under the certificate or by insurance code.

The state's insurance code provided, in part, that notice of cancellation "shall be in writing and shall be delivered or mailed to ... the named insured at the mailing address shown on the policy. The insurer maintained that the statute required notice only to "the named insured." However, the court disagreed, holding that the statute did not limit notice solely to the single named insured, but also applied to all insureds named in the policy, including the landlord.

Fictitious insured disputes

One of the areas where better risk management of certificates needs to be practiced is when certificates are issued to persons or entities who demand verification that they are additional insureds on some of the policies being verified. Too many times certificates are issued showing the certificate holder as an additional insured, but the policies are never amended to that effect.

The result is predictable: The insurer denies the certificate holder additional insured status, and the certificate holder ends up suing not only the person or entity who promised the certificate holder additional insured status, but also the insurance agent. To be fair about it, the certificate holder should not be punished. The coverage should be honored and the dispute resolved between the insurer and its agent.

Some insurers are attempting to resolve this problem by issuing endorsements to their policies stipulating that if a certificate is issued showing the certificate holder as an additional insured, the certificate holder will be automatically recognized as an additional insured.

This approach may work with most requests for additional insured status with the possible exception of project owners and contractors. The reason is that a growing number of project owners and general contractors are specifying in their contracts the nature of the additional insured status desired.

For another thing, some automatic additional insured endorsements actually being issued by the insurers provide very limited coverage, which could fall short of the coverage being sought. If this happens, the agent may still be involved in a dispute.

One approach being taken by some entities to ensure they are included on the policies of others as additional insureds is to request that the requested additional insured endorsement be issued and attached to the certificate. The agencies with policy-issuing authority probably can accommodate these requests. But they need to be careful that the policy the endorsement reflects also is modified.

Many agencies do not have policy-issuing authority; but, they can issue binders. In fact, when seeking additional insured status, some entities not satisfied with certificates of insurance are requesting binders that reflect the appropriate applicable additional insured endorsement. This approach may avoid problems, except that the binders may need to be reissued until the insurer issues the necessary endorsement.

Conclusion

The opinions of some people that the certificate of insurance is not worth the paper it is printed on are exaggerated. The certificate still is the most commonly used form for verifying coverages when time is of the essence. There are, of course, some drawbacks, notices of cancellation being a common one.

Fortunately for the producers of entities that are required to issue certificates, the consensus of the courts appears to be that the producers are not answerable to the certificate holder.

What really worries many certificate holders, and what should be of concern to producers, is when a certificate reflects that the policy has been modified with an additional insured endorsement when in fact it has not. The insured who agreed to have the policy issued with an additional insured endorsement is likely to have a problem.

In many cases, it is not unusual for insureds also to share the blame with their producers. In fact, producers who have been in this kind of predicament will attest to the fact that having to go to court on one of these issues is not worth the time, expense, and agony, and that better agency risk management is a more productive alternative. *

The author

Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is a committee member of the International Insurance Section of the Society of CPCU, on the Examination Committee of the American Institute for CPCU, and an active member of the Society of Risk Management Consultants.