Following Up on Certificates of Insurance
Many insurers don't want their agents to copy them on certificates they issue. Other carriers have expressed their intent to NOT copy certificate holders on cancellations. In some instances, even insureds don't want certificate holders notified. So, what's an agency to do? Should YOU be the one following up on all of those certificates?
In every E&O class you've ever attended, you were likely told to copy your insurers when issuing certificates of insurance. Invariably, someone chimed in that their insurers had told them they didn't want a copy and, likely, the instructor said something like, "Send 'em anyway."
Because of the cost and risk involved, some carriers have indicated that they will not notify certificate holders of policy cancellations. In one recent instance, the carrier advised some agents that it was THEIR responsibility to notify certificate holders (this communication was later retracted as having been sent in error). Just last week, we got the following email from an agent:
"We have recently been advised by one of our insurance companies that they will no longer send out notices to certificate holders in the event of a policy cancellation. Under these circumstances, what is the agent's exposure from an E&O perspective if the insurance company does not 'endeavor to' notify the certificate holder."
In some cases, insureds have gotten angry when a certificate holder was notified of policy cancellation or nonrenewal. As we all know, some cancellations and nonrenewals are issued when there is a change in carriers, and notifying certificate holders may create unnecessary confusion, distress and work.
So, to quote an old Karl Malden commercial for American Express travelers checks, "What will you do, what will you do?
There are four primary ACORD forms used to prove that insurance exists:
This article does not address the ACORD 75-S or ACORD 27 (the latter of which says the company WILL give notice of cancellation or policy changes that would affect the additional interest if required to do so by the policy or law). Instead, we'll focus on the ACORD Certificates 24 and 25-S, particularly the latter.
Both of these forms include three key provisions:
"This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below."
This statement attempts to establish that the certificate holder has no contractual rights under the certificate. It also points out that, regardless of what the certificate might say or imply, if there is a discrepancy between the certificate and policies, the latter govern.
"Notwithstanding any requirement, term or condition of any contract or other document with respect to which this certificate may be issued or may pertain, the insurance afforded by the policies described herein is subject to all the terms, exclusions and conditions of such policies."
Again, the certificate affords no contractual rights even if referenced or made a part of another contract between the insured and certificate holder. Even if the other contract establishes that certain coverages or conditions must be provided, and the certificate is provided of evidence thereof, such contractual requirement is not applicable to the certificate.
"Should any of the above described policies be cancelled before the expiration date thereof, the issuing insurer will endeavor to mail _____ days written notice to the certificate holder named to the left, but failure to do so shall impose no obligation or liability of any kind upon the insurer, its agents or representatives."
While this provision states that THE INSURER "will endeavor to" provide notice of mid-term cancellation, it is not obligated to do so and no liability for failure to do so will be imposed. More in this later.
In addition to the above, the ACORD 25-S includes the following provision on the second page:
"The Certificate of Insurance on the reverse side of this form does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder, nor does it affirmatively or negatively amend, extend or alter the coverage afforded by the policies listed thereon."
This attempt to establish that the certificate is not a contract is crucial to upholding the provisions cited above. And, again, this statement is designed to reiterate that the certificate is not part of the insurance contract and, therefore, cannot modify it.
The fact that the certificate does not and can not modify the policies is well established. Several insurance departments have mandated that certificate language cannot be modified in conflict with policy language (including that regarding cancellation) and at least one state requires that certificates be filed and approved just like policy forms. For more information about these issues, check out our certificates of insurance white paper.
In general. courts have held that a certificate of insurance does not grant any contractual rights to the certificate holder. In United States Pipe & Foundry Co. v. United States Fidelity & Guaranty Co., 505 F.2d 88 (5th Cir. 1974), the court ruled that the certificate did not grant contractual rights since there had not been any exchange of consideration as required to effect a valid, enforceable contract. One wonders, though, if at some point a certificate holder might allege that the consideration provided was the granting, for example, of a construction contract in exchange for the certificate and assurance of coverage, cancellation notice, etc.
In Lezak & Levy Wholesale Meats, Inc. v. Illinois Employees Insurance Co., 460 N.E.2d 475 (Ill. Ct. App. 1984), the court refused to permit the coverages implied on the certificate to supercede those actually provided under the insurance contract based on the fact that the certificate, according to its clear wording, was not part of the policy. A similar ruling was made in Pekin Insurance Co. v. American Country Insurance Co., 572 N.E.2d 1112 (Ill. Ct. App. 1991).]
Most recently, in Glynn v. United House of Prayer For All People, 741, N.Y.S.2d 499 (N.Y. App. Div., 2002), the court ruled that the premises owner was not named as an additional insured on liability policies issued to the owner's general contractor, thus precluding the liability insurer's alleged obligation to defend and indemnify the owner in actions arising from a fire, notwithstanding the fact that the general contractor's agent had provided the owner with a certificate of insurance.
However, where there is an implication that the certificate might be a part of the policy or controlling thereof, several courts have ruled in favor of the certificate holder. Such cases include White Motors Corp. v. Northland Ins. Co., 315 F. Supp. 689, 693 (D. S.D. 1970), J.M. Corbett Co. v. Insurance Co. of N. Am., 357 N.E.2d 125 (Ill. Ct. App. 1976), International Amphitheatre v. Vanguard Underwriters Ins. Co., 532 N.E. 2d 493 (Ill. Ct. App. 1988).
In the latter case, the court contrasted this decision with their earlier Lezak and Pekin decisions (see above) because the certificates in those cases clearly stated that they were not part of the insurance contract. These cases (along with insurance department directives) illustrate the importance of agents not unilaterally revising certificate wording nor issuing proprietary certificates. Attorneys and risk managers will often counsel their employers or clients to reword certificates to clearly state that they are part of the contract and that they grant an enforceable interest in the policy to the certificate holder. Beware!
Similarly, in Horn v. Transcon Lines, Inc, 7 F3d 1305 (7th Cir. 1993), the court found that the certificate was so misleading that the limitations on the scope of coverage in the policy could not be relied upon. These cases illustrate that, while there is general legal consensus that certificates do not create contractual obligations or rights, there are exceptions based on unique circumstances. In addition, a certificate holder could conceivably seek redress based on other legal grounds when certificates are inaccurate or imply rights due to their proprietary nature or diversion from "standard" wording.
For additional information, check out this article which cites several other court cases and concludes with, "However, where the certificate of insurance does not contain the disclaimer (or where the agent/broker modifies the standard disclaimer in such a way as to eliminate the operative language), the insurer cannot rely on policy provisions inconsistent with the terms of the certificate of insurance."
Finally, with regard to obligations to notify certificate holders of cancellation, again the above arguments apply, particularly with regard to agent notification. In fact, in at least one court case (Permanent General Assurance Corp. v. Jones, a 1994 Tennessee Court of Appeals case), the court ruled that, "The agent is under no duty to inform the client of policy cancellation if the client knew or should have known of cancellation by other means." While "client" refers to the insured, in general, the certificate holder has no greater rights than the insured. If there is a contract between the insured and certificate holder, it should be the insured's legal responsibility to advise of cancellation, not the insurer and certainly not the agent.
(Keep in mind that even the ISO additional insured endorsements don't add provisions for notice of cancellation. This is just one of the reasons OCP and Railroad Protective Policies are sometimes used rather than AI endorsements.)
Related to this issue, though, is the ACORD wording that "the issuing insurer will endeavor to" provide notice of cancellation. As stated in the ACORD form, the certificate is not part of the policy, not a contract with the holder, and the insurer is under no obligation to notify. However, if this wording is deleted or modified, as is often the case, or a proprietary form is used, it is possible that such obligations could be created.
In addition, one wonders why the "will endeavor to" language even exists at all. According to Merriam-Webster's Collegiate Dictionary, "endeavor" means:
endeavor, v., (1) to strive to achieve or reach; (2) to attempt (as the fulfillment of an obligation) by exertion of effort.
While, to our knowledge, this hasn't been tested in courts (at least successfully), could this very language imply that a contract exists since the insurer appears to be be making a promise to at least try to notify in fulfillment of an obligation? And, does such wording create at least a "moral" or ethical obligation? If the insurer, as some have stated, has no intention of notifying the certificate holder of cancellation, why imply that it will try?
And, if the agency takes it on itself to provide notice, does it create a greater exposure to E&O claims when it fails to do so? By abiding by this wording, does the agency establish an obligation separate from that in the policy? A plaintiff could conceivably argue that, in order to retain a client (and, thus, effectively accept such as consideration of the insured or certificate holder), the agency has created a contract or legal obligation apart from the policy. One public works bid document required an opinion from the Contractor's Insurance Agent (or legal counsel) that "he has read the applicable insurance requirements and the coverage provided complies there with." Could this create a separate obligation? Since we're not attorneys, we can's say for sure, but it certainly doesn't keep you from being sued on such basis.
In Bradley Real Estate Trust, et al. v. Plummer & Rowe Insurance Agency, Inc., 609 A2d 1233 (Sup. Ct. NH, 1992), the court said, "In effect, the certificate is a worthless document; it does no more than to certify that insurance existed on the day the certificate was issued. We leave it to the legislature or to the future bargaining of the parties to rectify inequities in the notification process."
In the case of Mountain Fuel Supply v. Reliance Insurance Co., 9333 F2d 882 (10th Cir. 1991), the court ruled that, "The language in the notice of cancellation clause appears to be phrased so as to avoid creating any firm obligation to give notice. It states that the insuring company 'will endeavor' to mail notice to the certificate holder, 'but failure to mail such notice will impose no obligation or liability of any kind upon the company.'" According to Bud Lyons of Alpine Risk Management, the agent was subject to an E&O claim for not requesting the carrier to send notice. The recommendation was that the agent remind the carrier that they should notify, thereby "endeavoring" to notify.
So, "what will you do, what will you do?" First of all, never ever modify a certificate in any way, shape or form without getting the insurer to sign off on it. We know, agents (e.g., your competitors) do it all the time (and we wonder why companies increasingly don't want to have anything to do with certificates). In a case one of our faculty members dealt with, the agent unilaterally (without the insurer's knowledge) issued a certificate without the "endeavor to" wording and provided 60 days notice of cancellation to the certificate holder. In his words, the insured told him another agent said he could do it, so this agent "had" to do it for "competitive" reasons.
In another instance of "market realities," the agent was asked to issue a certificate that indicated coverages that didn't exist. Although the agent had no market for such coverages, he stated that his "interpretation" was that the existing policies would cover the exposure and, if they didn't, his E&O policy would. He said he wasn't concerned because he was certain that a loss would never happen...and it didn't. But, folks, it's only a matter of time.