RISK MANAGEMENT

CERTIFICATE CHALLENGES

“Evidence of Insurance” form isn’t a certificate

By Donald S. Malecki, CPCU

Big problems are brewing over certificates of insurance. Agents and brokers beware!

About two years ago, an agent lamented that one of his insured’s large clients in California requested proof of both property and liability insurance on an ACORD 27 form titled Evidence of Property Insurance.

Common sense would dictate that this was an improper request because at the time there were other ACORD certificates for the purposes of confirming commercial property coverages (ACORD 24) and commercial liability coverages (ACORD 25-S).

It has not been unusual, however, to see the commercial property insurance certificate issued to also show the existence of liability insurance, instead of also issuing a commercial liability insurance certificate. The reverse has also been seen on occasion, where the commercial liability insurance certificate also shows the property insurance coverages. So long as no one complains, this practice of short-cutting confirmation of coverages will likely continue.

It did not take long to determine the rationale for requesting an Evidence of Property Insurance (which incidentally is not considered to be a certificate) to confirm liability-related subjects. Unlike a certificate of insurance, what this document lacks is the disclaimer that it does not amend, extend or alter the terms of coverages provided by the policies.

Without this disclaimer, the person requesting its issuance (the holder) is attempting to have the policy(ies) conform to certain items that few if any insurers would agree to insure. Among these requirements are the statements listed in the Evidence of Property Insurance that:

• The holder and its officers, directors, employees and agents are considered to be named insureds.
• A waiver of subrogation applies to the holder and its officers, directors, employees and agents.
• Contractual liability insurance covers the liability assumed by the named insured in the Indemnification clause of the contract between it and the holder.

The transfer of these items into the policy has been possible in part because of such court cases as Fuel Supply v. Reliance Insurance Co., 933 F.2d 882 (10th Cir. 1991), where the court held that the certificate holder, reflected as an insured on the certificate, was an additional insured despite the absence of an endorsement, because the certificate contained no disclaimer. This is in fact what holders of the Evidence of Property Insurance are hoping for in requesting the use of that document to confirm coverages.

Spreading like wildfire

It did not take long for the idea of using an Evidence of Property Insurance as an all-purpose method for confirming coverages to spread like wildfire. A newsletter published by a law firm and making its rounds throughout the United States appears to be a major impetus for the growing demand among businesses for the issuance of this evidence of coverage form.

This newsletter pointed out that (1) the vast majority of these proof of coverage forms have been produced by ACORD; (2) the difference between a certificate of insurance and an Evidence of Insurance is that the certificate does not amend, extend or alter the policy terms; (3) in its instructions to insurance agents and brokers, ACORD advises that the certificate is appropriate only where the recipient has no interest in the coverages of policies listed and that the evidence of insurance should be issued where the party desires to verify insurance coverages; and (4) while the Evidence of Property Insurance (27) is limited to property insurance, “there is no reason it cannot be adapted for use as evidence of liability insurance.”

For obvious reasons, the issuance of this document signed by an authorized representative of the insurance companies of policies reflected in the Evidence of Property Insurance would likely create a big problem for all parties.

Many agents and brokers know that complying with their clients’ requests to issue the Evidence of Property Insurance to confirm all coverages is contrary to the uses prescribed by ACORD. In fact, agents should avoid complying with such requests, despite the common cry of businesses that “If you do not do it, we will find someone who will.” No doubt there are agents and brokers who will comply. But the smart ones who do not want to spend unproductive time and expense in the courts will not.

New ACORD forms

Recently ACORD, which offers some 450 approved forms, introduced what is referred to as the “Evidence of Commercial Property Insurance” Form 28. It is said to have been developed in cooperation with the Mortgage Bankers Association, among others, in response to the need for a more comprehensive form to convey coverage information about commercial property.

More specifically, Form 28 is intended for mortgagees, additional insureds and loss payees who provide mortgages or loans on real property. The purpose of this document is to eliminate the need to issue certified copies of the policy to financial institutions and other lenders.

Form 28 contains a lot of information for those who want to verify their interest in commercial property, including a list of some important coverages where the completer checks a ‘yes’ or ‘no’ box, depending on the coverage’s applicability, and space for showing the limit, sub-limit and deductible.

The items comprising this list are: business income/rental value; blanket coverage; terrorism coverage with additional questions regarding whether coverage is provided for certified acts, is a stand-alone policy or includes domestic terrorism; coverage for mold; mold exclusion; replacement cost; agreed amount; coinsurance; equipment breakdown coverage; law and ordinance coverage with additional questions on the applicability of coverage for loss to the undamaged portion of the building, demolition costs or increased costs of construction; earthquake; flood; wind/hail; and permission to waive subrogation prior to loss.

In the preamble of each document, ACORD points out that an important distinction among the Certificate of Property Insurance (ACORD 24), Evidence of Personal Property Insurance (ACORD 27), and Evidence of Commercial Property Insurance (ACORD 28) exists. The Certificate of Property Insurance contains the above noted disclaimer, i.e., it does not amend, extend or alter the policy terms, whereas neither Evidence of Property form contains the disclaimer.

This distinction should be downplayed because if it gets into the wrong hands, it will generate and prolong the same kinds of requests being made by businesses that want the Evidence of Property Insurance issued to confirm all coverages, both property and liability.

What perhaps should be emphasized instead is that the Evidence of Commercial Property Insurance (ACORD 28) is intended to be issued solely to those who require proof of a verifiable interest in the real property being covered by insurance. In fact, the holder of such an evidence form is referred to as an “additional interest.” The Certificate of Property Insurance (ACORD 24), on the other hand, is intended to be issued to those who have no verifiable interest.

Another advantageous feature of the Evidence of Commercial Property Insurance—commonly sought by holders of insurance certificates—concerns the matter of cancellation. This provision states in part that the “company will give the additional interest identified . . .____ days’ written notice, and will send notification of any changes to the policy that would affect that interest, in accordance with the policy provisions or as required by law.”

This cancellation provision is unlike what is contained in the Certificate of Property Insurance and Certificate of Liability Insurance, where the insurer makes no affirmative promise to notify the certificate holder, but merely to “endeavor” to do so. The common reasons given are that there is no privity or contract between the certificate holder and insurer, and it is only the first named insured of both the property and liability policy who is promised a cancellation notice.

The second reason is more legitimate than the first. What defeats the argument over the lack of privity in the majority of cases today that involve certificates of insurance is the situation where certificate holders also are additional insureds, which usually requires an additional charge. Whether the insurer elects to charge or not, there should be privity, because an additional insured is a party to the contract.

Furthermore, if an insurer were to accept a certificate with the word “endeavor” deleted, the insurer might be held to be in violation of its policy filing where notice, as stated in the policy, goes solely to the named insured, unless an endorsement is attached promising such notice to additional insureds/certificate holders.

Time for a change

Ask agents, brokers, and underwriters what they think of insurance certificates and evidences of insurance, and their responses are likely to be similar: They do not like them. One reason is that they are time consuming to complete accurately and, from an insurer standpoint, difficult to retain and inventory.

In fact, it was not too long ago that some insurers took the bold step of instructing their agents to issue certificates and keep a log of them, but not to send certificates to the underwriters. At the other end of the spectrum, though, some insurers want to review certificates and underwrite from them.

Realistically, however, matters concerning certificates of insurance are going to become more complex with time. Given the rate at which coverages are being whittled down with exclusionary endorsements, people who want confirmation of coverage either will insist on reviewing the actual policies of others or will want similar checklists as are contained in the Evidence of Commercial Property Insurance.

In fact, the ACORD Certificate for Liability Insurance (forms 25 and 25-S) requests that exclusions added by endorsement be listed. Where those who are completing these certificates are not adding this list when they should, they are misrepresenting the coverage and could be confronted with problems when some question of coverage arises.

However, not all agents and brokers have copies of the exclusions that may apply to policies. Some have a list of such exclusions, because forms and endorsements are shown on their dailies (i.e., documents reflecting information commonly shown in the policy Declarations), but they do not have a clue about what these endorsements say. (This is a subject that requires its own in-depth article for the future.)

In any event, the time appears ripe for insurers once again to begin issuing certificates as they have done in the past. Who knows better what a given policy covers than the underwriter and his or her staff? n

The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU and is an active member of the Society of Risk Management Consultants.