1 Certificates of Insurance Issues & Answers Second Edition March 2008 Copyright , Independent Insurance Agents & Brokers of America, Inc. All rights reserved.
2 DISCLAIMER AND COPYRIGHT Page 2 Disclaimer The purpose of this paper is to assist agents and brokers in considering issues relevant to certificates of insurance. The paper includes only general information, and is not intended to provide advice tailored to any specific insurance situations. It was prepared solely as a guide, and is not a substitute for agents and brokers independently evaluating any relevant business, legal or other issues, and is not a recommendation that a particular course of action be adopted. If specific advice is required or desired, the services of an appropriate, competent professional should be sought. Copyright Copyright Independent Insurance Agents & Brokers of America, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or media or by any means, including without limitation electronic, mechanical, and recording, except for brief quotations in printed reviews, and for the worksheets in the Appendix to be used by the authorized recipient of this publication, without the prior written consent of the Independent Insurance Agents & Brokers of America, Inc. Certificates of Insurance: Issues & Answers Second Edition, March 2008 Written by: William C. Wilson, Jr., CPCU, ARM, AIM, AAM with contributions by volunteer members of the Faculty of the Big I Virtual University Design and Layout by: Jennifer Becker, IIABA The most recent edition of this document can be found at Certificates.htm, along with a number of related documents and articles.
3 TABLE OF CONTENTS Page 3 Acknowledgements 4 Preface 5 Introduction 7 E&O Statistics & Case Studies Scope of the Problem Construction Contracts Contractual Insurance Requirements 13 Reviewing Contracts for Insureds Primary and Non-Contributory Waiver of Subrogation Notice of Cancellation Contractual Liability vs. Additional Insured Status Certificate vs. Policy Limits Policy and Processing Forms 25 Additional Insured Endorsements ACORD Forms ACORD 24 Certificate of Property Insurance ACORD 25 Certificate of Liability Insurance ACORD 27 Evidence of Property Insurance ACORD 28 Evidence of Commercial Property Insurance Copyright Issues Non-ACORD Forms, Agency/Company Agreements and E&S Markets Agency Certificate Procedures Statutes and Regulations 36 Special Supplement Court Cases 37 Special Supplement Conclusions 38 Appendix 42 Certificate Checklist Additional Reading & Resources How to Access the Big I Virtual University How to Subscribe to the FREE VUpoint Newsletter
4 ACKNOWLEDGEMENTS Page 4 Acknowledgements The foundation for this document is a series of Virtual University web site articles written by myself and members of our 50-person volunteer faculty and published in our free bi-weekly newsletter, The VUpoint. To subscribe to this free newsletter, go to: This foundation of information was supplemented by literally hundreds of s, articles, and conversations with insurance and risk management professionals from around the country. Once the draft of this paper was completed, I distributed it to over 100 agents, consultants, educators, attorneys, and risk managers for their feedback. In particular, I d like to thank author, speaker, and consultant Don Malecki for his thoughtful comments, several that I ve quoted liberally within the text of this document. In addition, thanks to Joel Volker of ACORD and the staff at Westport Ins. Co., the E&O carrier for most IIABA members, for all of their helpful suggestions. In March 2008, after our board of directors adopted a position paper on certificates of insurance, we began to offer this white paper and related documents and articles for free to the general public. To access our Certificates Resources section of the public area of our Virtual University web site, go to: Finally, throughout this paper, you will find web links to information on our web site as well as others. Most of these links take you to the public area of our web site. However, because the vast majority of our 4,000+ pages of content is proprietary, some of these links require a login and are accessible only to IIABA members and paid VU subscribers. If you are interested in membership or subscription, go to: Bill Wilson, CPCU, ARM, AIM, AAM Director Big I Virtual University January 2007 March 2008
5 Page 5 PREFACE Preface A certificate of insurance is a document issued by or on behalf of an insurance company to a third party who has not contracted with the insurer to purchase an insurance policy. The most common type of certificate is that provided for informational purposes to advise a third party of the existence and amount of insurance issued to the named insured. (Allan D. Windt, Insurance Claims and Disputes, 4th ed., 2001) These informational certificates are usually issued in conjunction with a contractual relationship between a third party and the named insured, requiring that the named insured have a particular amount and type of insurance. Such requirements are particularly common in construction contracts with large contractors, government entities, and major corporations. In addition to describing the insurance available to the named insured, a certificate may also convey information that the certificate holder is an additional insured under the policy issued to the named insured, thus giving the certificate holder some interest in the policy itself. According to the 8 th Edition of Black s Law Dictionary, a certificate of insurance is A document acknowledging that an insurance policy has been written, and setting forth in general terms what the policy covers. Certificates are simply snapshots of basic policy coverages and limits at the time of issuance of the certificate. Certificates are not intended to modify coverages or change the terms of the insurance contract. From the insurance agency s perspective, problems with certificates most often arise when they are requested by insureds in response to business contracts that seek to hold them responsible for any and all liabilities or similar wording. In addition, the certificate holder may request the insured to ask the insured s agent for a letter attesting to the fact that in the opinion of the agent, the policy contains the required insurance coverages/ indemnifications required by the contract with the insured. These words are excerpted from an actual letter received by an agent on behalf of his insured. In this instance, the certificate holder is demanding that the insured s agent warrant coverage to their benefit without exclusions, something that is impossible to do. In addition, the contract might require that the certificate holder be named as an additional insured (something the insurer may or may not be willing to do), be provided notice of cancellation (something not often provided for in an insurance contract for additional insureds), or be provided with a type of coverage (e.g., completed operations) that the insurer cannot or will not provide. Such contracts may specify certain endorsements by form number and edition date that the insurer cannot provide because they have been superseded by newer editions and the older ones have been withdrawn. As a result, agents are sometimes asked to produce a certificate that cannot comply with the contract the insured has signed. Refusing to do so, agents are often faced with an assertion by the insured that they know of agents who, according to the certificate holder, can or will provide such certificates. Failure to do the same could mean the loss of an account for the agency.
6 Page 6 PREFACE To illustrate, here is an actual inquiry from an agency: Is there a paper explaining to account managers what is automatically included in a CGL policy, who is covered contractually and how the terms hold harmless, waiver of subrogation, and primary non-contributory are addressed in the standard policy language of the CGL and commercial auto? More and more requests are coming in trying to transfer liability to another party. It is getting very difficult to explain to our employees how to handle these requests. Once we determine what language can or cannot be put on the certificate, we then have to try to explain it to our customers. Usually, they have signed a contract agreeing to specific coverage language and are then upset that it cannot be done. Unfortunately, we are considered by some clients to be the 'bad guys' that are jeopardizing their livelihoods. I'm not sure exactly what the answer to this problem is or anything can be done about it, but maybe a clarification 'paper' would help. When IIABA members speak, IIABA staff listens. Read and enjoy.
7 INTRODUCTION Page 7 Introduction In this section, we ll examine why agents need to be concerned about certificate of insurance problems, along with the scope of the problem. E&O Statistics & Case Studies We all know that, by and large, certificates are not contracts. So, there s no need to be overly concerned about the accuracy and wording on the certificate, right? Not according to E&O statistics. During the past year of data collection, E&O claims involving certificates of insurance have increased 28%. About 1 in 25 E&O claims involves a certificate of insurance, with over half of all claims arising from an error or omission by a CSR. About 75% of E&O claims for certificates involve a CGL policy, with the next highest category being workers compensation at 10%. The two main sources of certificate E&O claims are claims of failure to add, or improperly identifying, additional insureds (36%) and misrepresenting coverage on the certificate that doesn t actually exist (21%). CSRs are primarily accused of being responsible for the former and producers for the latter. Agents often fall into a routine with policyholders that frequently require certificates. In these situations, the agent can become lax in checking to make sure that the coverage hasn t changed. E&O claims have arisen from certificates issued on policies that have lapsed or certificates that indicate a specific type of coverage is in place when, in fact, the insured recently dropped it. This problem may be more prevalent in larger agencies where the personnel issuing certificates are different from those making policy changes. It is important, no matter what the size of an agency, that procedures be in place that require staff to confirm all coverages before issuing a certificate. In one recent case, the agent placed a CGL policy for a contractor that had successfully bid a project with the federal government. The agent issued a certificate to the government reflecting coverages as of a certain date. Shortly thereafter, the contractor allowed its coverage to lapse due to nonpayment of premium. Subsequently, the contractor negligently caused damage to government property. The government sued the agent for failing to advise of the cancellation. Although a certificate is intended to be a snapshot of coverages as of the date of issuance, some non- ACORD certificates require notice of cancellation. Since the agent above had unilaterally issued the certificate, the government argued that the language created a duty on the part of the agent. The government also argued that certain federal regulations imposed a duty on the agent to update the certificate for the lapse of coverage. As discussed later, all non-acord forms should be referred to the insurer for issuance.
8 INTRODUCTION Page 8 Scope of the Problem There seem to be three major problems that come up often regarding certificates of insurance: (1) certificate fraud by agents and insureds, including agents who indicate coverages that don't exist so an insured subcontractor can get a construction job or get paid for one, (2) onerous contractual insurance requirements by large contactors, huge corporations, governmental/public entities, etc. that cannot be met by coverages typically available in the marketplace, and (3) the issue of (not) notifying certificate holders of cancellation. Certificate fraud is an issue addressed largely by contract law, regulatory governance, and specific statutes in some states. Certificate fraud is not limited to unscrupulous agents and, in fact, may be undertaken by insureds themselves. To illustrate one aspect of the problem, here is a recent inquiry from an agent: I issued a GL binder for a 30-day period to a general contractor/design-build headed down to Florida to do some work for a large city there. A lady with the city called yesterday and wanted to file a claim. I told her the coverage was canceled before the date of loss. She said my binder indicated coverage was for a 12-month term. She faxed it to me. The contractor I assume used Excel and created his own what he called ACORD Insurance Certificate Binder 75 - (1/98). This thing is so real it's scary, except the spelling was as follows: Limbirty - written five times (should be liability ) Residendential Martthew Propety Bro - for broad Comercial You would think a large municipality would be more diligent in scrutinizing certificates and binders. I m aware of some that won t even accept them anymore they want to see the actual dailies and/or policy forms and often verify them with a phone call because of the rampant fraud. The issue of onerous insurance requirements is largely an educational one. From the standpoint of many businesses and governmental entities, it doesn t hurt to ask for the moon, even if you know you won t get it. As one attorney noted, I ask for everything I can get. It s the other guy s responsibility to say no. In many instances, these organizations are asking for concessions for which there is no insurance product in the marketplace. They ask because they have the leverage to do so. Unfortunately, some agents will indicate, usually by a certificate of insurance, that their insured is in compliance with specific insurance requirements. It could be that the additional insured isn t concerned, knowing that the agent s E&O insurance provides a backstop. Often organizations will ask for coverages out of ignorance. Contracts may specify additional insured endorsements that are dated over 20 years ago. If a company (or ISO) has filed a new endorsement and withdrawn an older one, the carrier cannot legally provide the older form without refiling it. However, some agents indicate on the certificate of insurance that the form or its equivalent is being provided.
9 INTRODUCTION Page 9 One other issue is the will endeavor to cancellation wording that very few insurers follow. This has the potential to become a legal problem, though many consider it one of ethics...is it ethical to provide a certificate that says the insurer will attempt/try (i.e., endeavor ) to provide cancellation notice when it's clear that the insurer has no intention of doing so? These and other issues are addressed in this paper. Construction Contracts Consider this all-too-common scenario: Your insured is bidding on a construction contract with a large, national builder. The contract includes an insurance addendum that requires that certain coverages, limits and terms be in place. Compliance would necessitate adding the builder as an additional insured, restructuring the coverages, and even modifying the coverage forms themselves (or implying that the forms have been modified). The builder also wants major revisions to the certificate(s) of insurance. Of course, the current carrier refuses to do any of this. What do you do? The insured insists that, without these concessions, he will not get the job. You know that if you don't assist the insured in complying, you may lose the account to an agent who is willing and (allegedly) able to meet the builder's demands... sometimes, remarkably, with the same carrier who refused your request. Before we examine the issues and seek some solutions, let's go back to the start. Here's a list of some of the requirements in this construction contract insurance addendum for this builder, along with some commentary (Note: These are all real contract provisions.): The following additional insured endorsements must be added to the contractor's CGL policy (though it isn't clear which): CG ; or CG ; or CG (but only if modified to delete the word ongoing and insert the sentence Operations include ongoing and completed operations to track the 1985 versions). o CG Additional Insured Designated Person or Organization says, WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule as an insured but only with respect to liability arising out of your operations or premises owned by or rented to you. o CG Additional Insured Owners, Lessees or Contractors (Form B) says, WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of 'your work' for that insured by or for you. o CG Additional Insured Owners, Lessees or Contractors (Form B) says, WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured.
10 INTRODUCTION Page 10 Note from the contract wording that they want the word ongoing deleted and replaced to ensure that coverage is provided for both ongoing and completed operations. This requires that an older withdrawn endorsement be modified, which quite possibly cannot be done by the carrier without violating insurance laws. In addition, the wording of the referenced 1993 form was deliberately modified by ISO to eliminate P/CO coverage for additional insureds to begin with. Keep in mind that many insurers, particularly those that closely follow ISO filing schedules, no longer have the requested 1985 endorsements available. The drafters of the construction contract cite the older endorsements either because they don't know newer editions exist, don't want to modify their contract every time the forms change, or because they prefer the language of the older forms. Sometimes endorsements are revised because of revisions in the primary policy. Using an older endorsement with a newer primary policy could create havoc in coverage. For example, revising an old additional insured endorsement to add completed operations coverage will create a problem if the current primary policy form does not include that coverage for the additional insured (more on this below). Even more important, if the carrier has adopted a new endorsement, chances are they may be legally unable to use an older one, it having been withdrawn at the time the newer form was filed. It is often best if all parties work with the latest forms available, some of which may be more appropriate for current exposures and arrangements, such as the CG and CG cited below (forms current at the time of the publication of this paper). The additional insureds are to include the builder entities (a partnership and corporation), the site owner, and all of their respective officers, directors, partners, members, and employees. The additional insured endorsements are designed to pick up incidental, largely vicarious, liability exposures of specific persons or organizations. The contract provision in this example basically expands the contractor's CGL Who Is An Insured section to include almost everyone affiliated with the builder and/or owner, including office workers at the corporate headquarters. As an agent, do you realistically expect your carriers to assume that kind of exposure? The contract effectively requires that the contractor s CGL policy continue in force to cover the additional insureds for BI and PD that occurs after all work on the site has been completed. There is no specific termination date and, at the builder's request, the contractor must provide certified copies of all subsequent policies for at least five (5) years. This would preclude any future designated premises exclusions. If the contractor goes out of business, this would appear to necessitate discontinued operations coverage. In addition, as discussed below, it is even questionable whether the additional insured has P/CO coverage...the modified additional insured endorsement implies that it exists, but the current CGL policy may not grant that coverage to additional insureds. At issue is whether this is reasonable and, as the agent, are you willing to provide this service indefinitely (or for at least five years) for free? Are you willing to remain vigilant in monitoring continuing coverages for perhaps dozens or hundreds of projects for a one-time commission? Do
11 INTRODUCTION Page 11 the rating plans in place for your carriers contemplate this broader, longer term exposure? Is your insured willing to deplete his aggregate limit several years down the road due to a claim against one of these additional insureds? The contract requires thirty (30) days notice by certified mail for cancellation, nonrenewal, and modification or reduction in coverage. It also mandates that the certificate of insurance be revised to delete the wording endeavor to and but failure to mail such notice shall impose no obligation or liability of any kind upon the company, its agents or representatives from the cancellation portion of the certificate. The contract, to the fullest extent permitted by law, also calls for the deletion of anything in the certificate of insurance that would imply that it does not confer rights to the insurance. This probably refers to the language on the ACORD 25 that says, 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. There is significant case law to support the position that the certificate holder has no rights, under the certificate, to the insurance contract. Clearly, the builder wants to attempt to create such rights, even if there is no basis for requiring the carrier to do so. In addition, the back of the certificate of insurance form says, 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. The back of the form also says, If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed. A statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s). The contract clarifies that coverage is not limited to vicarious liability and it prohibits any endorsement limiting coverage for ANY negligent acts, errors or omissions of the builder. Although it may or may not be the intent, this would imply that coverage goes beyond that of the CGL which does not cover, in a strict sense, errors or omissions that do not meet the definition of occurrence and result in BI or PD. It may also imply that no exclusions apply, as ludicrous as that may sound. The contract forbids exclusionary language for things such as soil subsidence, earth movement, pollution, mold or fungus, EIFS, etc. How many agents represent carriers whose CGL policies cover pollution without exception? Increasingly, most policies now also exclude or limit claims arising out of fungi and EIFS. This one provision alone makes it virtually impossible for the contractor to comply with the contract. If insurable by law, the policy must cover punitive damages, fines or penalties. CGL policies don't cover fines or penalties...in fact, it's likely that an agency s E&O policy doesn't cover them either.
12 INTRODUCTION Page 12 The contractor must require (and provide proof of upon request) each subcontractor to comply with the insurance requirements of the contract and the sub must sign a hold harmless/indemnity agreement specified by the contract, naming the builder, owner, officers, etc. (not the contractor) as beneficiaries. A complete subrogation waiver is also required. Unless prohibited by the policy or law, the contract requires an assignment of the policy to additional insureds if the contractor is out of business or cannot be located. The contract makes the contractor's policy primary, which isn't unusual for additional insureds... the Other Insurance condition of the 1998 CGL states that it is excess over, Any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement. Note, with regard to the discussion above, that this applies only to the Named Insured, not all other additional insureds specified by the construction contract. Also note that this applies to operations...it does not mention completed operations as required by the contract, though one could interpret operations broadly enough to include both ongoing and completed operations. This is the danger that arises when trying to apply nebulous contract provisions across varying editions of policy forms and endorsements. What is particularly disturbing is that coverage is required to be extended to the builder on a primary basis for its own negligence, not just the contractor s negligence. In fact, it makes the contractor s insurance primary for ALL acts of the builder. So, the contract does more than provide primary coverage for the builder if held liable for the contractor's actions...it attempts to provide direct liability coverage for the builder even if the contractor isn't liable. The current ISO additional insured endorsements do not cover sole liability of the additional insured, as outlined in this VU article: ISO s New Additional Insured Endorsements This agreement is a good example of a risk manager and/or attorney gone amok (not from the builder s perspective, of course). The attempt here is to essentially remove all potentially insurable risk from the builder and place it on the shoulders of the contractors and subcontractors who typically have far fewer resources than the large corporations making these demands. The builder can, or can at least try to do this because of size and market clout. By passing along significant costs to contractors and the insurance industry, they keep their costs lower and make themselves even more competitive relative to other builders who don't require such onerous contracts. So, what can you, as the agent, do when faced with these types of insurance requirements imposed on your insureds? These issues and options are what we will explore in this paper.
13 CONTRACTUAL INSURANCE REQUIREMENTS Page 13 Contractual Insurance Requirements Certificate requests often arise from contractual relationships. A client s contractual obligations can present several problems for agents. First, agents are often requested to review contracts for their clients, despite the fact that few agents have law degrees or are otherwise well versed in how to complete contract reviews. Second, these contracts often include undefined terms or requirements that make compliance difficult if not impossible. For example, parties requesting additional insured status often want the other party s CGL to be primary and noncontributory, with the latter term being undefined and probably ambiguous. Waivers of subrogation are commonly requested and certificate holders invariably want notice of cancellation that is typically more liberal than the policy even grants the named insured. Third, there are often issues as to how additional insured status is granted and whether the CGL, in the absence of an additional insured endorsement, might provide some coverage to another party via the definition of an insured contract.. Finally, there are decisions that are steeped in ethics rather than contract law or other legal theories. For example, if a contract specifies a minimum liability limit but the insured s policy provides a higher limit, on the certificate where it asks for the limit of insurance, should the agent show the requested limit or the policy s actual limit? Another such decision involves notice of cancellation and is discussed later in this section. So, let s examine each of these issues Reviewing Contracts for Insureds It is not uncommon for insureds to ask agents to review the insurance requirements in contracts such as leases and construction agreements in order to advise what types of insurance are needed to comply with these contractual requirements. For example, here is how one agent says his office handles such requests: Our agency permits insureds to send in copies of the contract or at least the insurance portion (I feel better looking at the whole contract). We will then review the insurance requirements and give our insured a list of the insurance deficiencies and needs in the proposed coverage (if no contract is received, we tell the insured that we have no idea if they have the proper coverage). Some insurance deficiencies can be remedied by buying coverage. Some are beyond what the insurance company is willing do to. Some are beyond what the insurance industry is willing to do. We also stamp each certificate with the following: 'This certificate of insurance represents coverage currently in effect and may or may not be in compliance with any written contract.' In our experience, no insurance policy or collection of insurance policies will completely cover
14 CONTRACTUAL INSURANCE REQUIREMENTS Page 14 most insured's indemnification promises. We make that clear to our clients and leave it up to them how to best advise the parties they're contracting with. "We will NOT, under ANY circumstances, issue a certificate that implies there is coverage of some type or at some limit that does not exist. One problem is that we typically see the contracts AFTER they have been signed and we're asked to certify coverage the insured doesn't have, can't get, or is impossible to provide. Sometimes an insured or prospect will say that other agents do this, and that they can take their business to them if we won t do it. I have personally lost at least two accounts because of this. As far as I'm concerned, these are not the types of clients and business relationships I want, so I have no problem letting my competitors deal with them." [emphasis added] From a practical standpoint, many agencies feel that the depth of review of such contracts is a business decision made by the agency. From an E&O standpoint, the recommendation is for the insured or prospect to have their own legal counsel proficient in contract law review these contracts, then inform the agent what exposures need addressing from an insurance standpoint. If agents and (probably more often) brokers are taking on the obligation of reading and interpreting a construction contract to determine what additional insureds or lienholders need to be named, they may need to seek legal advice because they may be assuming responsibility for the accuracy of their interpretation of the contract, even if the insured consults with his or her attorney. In some states, and likely under egregious circumstances, that also may expose the agent to claims by the state bar association that the agent has engaged in the practice of law without a license. Few agents and brokers have the legal training and skill to interpret a contract that could be 200 pages long, with insurance requirements sometimes buried throughout the document. Some of these contracts are very hard to understand. Many any contract lawyers will tell you that business and commercial construction contracts are more complicated and harder to understand than most insurance contracts. So, in general, these types of contracts should be analyzed and interpreted by the insured s lawyers, not producers or CSRs. The trend in risk management is to try to transfer all liability (or as much as is legally possible), whether insurable or not. It takes an astute, well-trained, experienced, and qualified individual to undertake the scavenger hunt often necessary to identify exposures in lengthy or complex contracts. To summarize, business contracts can be very complicated. Construction contracts, in particular, can be huge and complex. When these agreements are reviewed by individuals who do not have the experience or qualifications to do so, it increases the likelihood of errors and thus exposure to liability. The following is a short article on this subject written by VU faculty member Mike Edwards of Edwards & Associates, reprinted with his permission: Reading Contracts for Insureds Guidelines and Sample Disclaimer As every E&O attorney knows, there are a sizeable number of E&O claims against agents that arise out of the agent trying to do a favor for an insured. Especially for agents that insure contractors, that favor often involves reading or reviewing contracts signed by the contractor. Of course, other insureds sign contracts, such as lessors, lessees and others.
15 CONTRACTUAL INSURANCE REQUIREMENTS Page 15 Agents are caught in a Catch-22 when it comes to reviewing contracts signed by their insureds. To run from the task would call into question the agent s professional service. On the other hand, to tackle the project with no written guidelines or disclaimers could be disastrous for the agent and agency. The most common sense approach, and one that is recommended by many E&O attorneys, is the middle ground: review the contracts, but with ample caveats. Of primary importance is to state in writing that the agent is only reviewing the insurance requirements of the contract, and is not providing any sort of legal advice. In addition, such a disclaimer should be provided at least annually to insureds for which the agent frequently and routinely reviews contracts. For situations where a contract review is done only infrequently, it is recommended that the disclaimer be provided to the insured each time. Those who favor a conservative approach recommend using the written disclaimer each time a contract is reviewed, no matter how many contracts are reviewed for an insured each year. Below is a possible disclaimer letter that could be used when reading contracts for insureds. This draft disclaimer is provided solely for illustrative purposes, and any disclaimer actually used by an agency should be reviewed with the agency s legal counsel prior to actual use with an insured. Our Agency has, upon your request, reviewed the contract indicated above. Specifically, we reviewed only the insurance requirements contained in Section, Page. The scope of our review was to determine if the current insurance program which you have placed through our Agency addresses the types and amounts of insurance coverage referenced by the contract. We have identified the significant insurance obligations, and have attached a summary of the changes required in your current insurance program to meet the requirements of the contract. Upon your authorization, we will make the necessary changes in your insurance program. We will also be available to discuss any insurance requirements of the contract with your attorney, if desired. In performing this review, our Agency is not providing legal advice or a legal opinion concerning any portion of the contract. In addition, our Agency is not undertaking to identify all potential liabilities that may arise under this contract. This review is provided for your information, and should not be relied upon by third parties. Any descriptions of the insurance coverages are subject to the terms, conditions, exclusions, and other provisions of the policies and any applicable regulations, rating rules or plans. As an example of how simply doing a favor for an insured by reading or reviewing a contract can quickly bring an agent to the verge of litigation, a recent case is illustrative. The agent insures several large contractors, and reviews contracts for these insureds on a very regular basis. In an unfortunate oversight, the agent failed to notice that one construction contract his insured had signed required limits of $20 million. The insured carried $10 million limits. Two weeks after the job had begun, the risk manager for the building owner called the
16 CONTRACTUAL INSURANCE REQUIREMENTS Page 16 contractor to notify him that the Certificate of Insurance the agent had sent reflected inadequate limits, and that work must stop immediately until sufficient limits could be obtained and verified. The contractor immediately called the agent, who was totally embarrassed by the oversight. Later that same day, the agent was able to obtain the additional $10 million excess quote for approximately $8,000 in premium. The contractor was then angry that the additional premium was essentially going to have to come out of his profit on the job, since he hadn t figured that additional cost into his bid. He told his agent that he should pay the additional premium, since it was the agent s error. While this case has not yet gone to trial by the publication time of this article, the agent was advised by an E&O attorney not to pay the additional premium no matter how embarrassed he was by the oversight. If the agent paid the $8,000 additional premium, the attorney advised that it might be construed as admitting fault, which violates one of the key provisions of all E&O policies. Below is an excerpt from a typical E&O policy: General Terms & Conditions. 1. Reporting and Notice. Insured s duties in the event of a claim or any potential claim: A. The insured shall not, without our written consent, do any of the following: 1. Admit liability; 2. Participate in any settlement discussions nor enter into any settlement; or 3. Incur any costs or expense. Since the job had been underway for two weeks, with a $10 million gap in limits, the agent could theoretically be liable for the missing $10 million should an injury already have occurred. And by paying the additional premium and thus possibly being construed as admitting fault, the agent might invalidate any otherwise applicable E&O coverage and be bare with no E&O coverage at all. Moral of the story: Doing favors for insureds can lead to bad results for the agency if not handled just as carefully as any other regular tasks. Moral #2: If reviewing contracts for insureds, use an appropriate written disclaimer letter. Primary and Noncontributory Many, if not most, contracts require that (sub)contractors or other parties provide coverage that is primary and noncontributory. Certificates with this language are issued daily by agents attesting that the referenced CGL meets these requirements. However, is this really true? In general, the current ISO CGL policy on which someone is named an additional insured DOES provide primary coverage for that additional insured. In addition, the additional insured s own CGL states that it is excess over any policy that names them as an additional insured. Here is the applicable ISO 2004 CGL language:
17 CONTRACTUAL INSURANCE REQUIREMENTS Page Other Insurance If other valid and collectible insurance is available to the insured for a loss we cover under Coverages A or B of this Coverage Part, our obligations are limited as follows: a. Primary Insurance This insurance is primary except when b. below applies. If this insurance is primary, our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in c. below. b. Excess Insurance This insurance is excess over: (2) Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured by attachment of an endorsement. Of course, this assumes that all of the policies involved are ISO forms or otherwise concurrent in language to the desired effect. At issue is how does the agent know if this is actually the case? All the agent can do is attest that his or her insured's policy naming the certificate holder as an additional insured IS primary. Again, under current versions of the ISO CGL, primacy isn't a major issue, but it can be under non-iso or even non-cgl forms. For example, the 2006 ISO Business Auto Policy is primary only if the named insured owns the vehicle or assumes liability under contract (Condition 5, Other Insurance, subparagraph c.); otherwise the coverage is excess. Umbrella policies are company specific and therefore do not follow ISO verbiage in all instances. And, again, not all CGLs are ISO. However, does the ISO CGL policy respond on a "noncontributory" basis? The answer to that question depends on what the author of the contract means by "noncontributory." This term usually is not defined in a contract and, when you ask what the term means, the person offering the contract probably doesn't have a clue. If you can track down the attorney who wrote it, chances are he or she won't know either since it's a boilerplate term they picked up somewhere along the way, and even if they do, that may not be the interpretation of all parties to the contract. If "noncontributory" means that the coverage is intended to be excess only, then the ISO CGL and additional insured endorsements pretty much take care of that, as pointed out above. The following contractual insurance requirement implies that noncontributory and excess are synonymous: The General Liability endorsement shall be at least as broad as Form CG edition. Each policy shall stipulate that the insurance afforded to the additional insureds shall apply as primary insurance and the any other insurance carried by the Contractor, the Owner, or the Lender, if any, or their directors, offices or employees will be excess only and will not contribute to the primary insurance. [emphasis added] On the other hand, if it means that the insurance won't contribute, even on an excess basis, then you have a problem since the insured has contractually agreed that his or her CGL will be the sole source of recovery. Insurers often will add a certificate holder as an additional insured on a primary basis, but not on a noncontributory basis.
18 CONTRACTUAL INSURANCE REQUIREMENTS Page 18 To illustrate why some carriers avoid this language, if "noncontributory" means that, under the contract, the additional insured's policy won't contribute at all to a claim or suit, then effectively the party naming them as an additional insured has agreed to an indemnity arrangement. If the insured s CGL limits are inadequate, then in order for the additional insured's policy to be noncontributory, the insured must pay any amount over and above his or her CGL limit out of pocket. If the additional insured's CGL insurer does tender a defense and indemnity, then the additional insured's insurer is subrogated to the additional insured's contractual right to recover from the party who had inadequate limits (despite the limits meeting the contract's minimum requirements). Insurers will also most likely refuse to permit the primary and noncontributory language on the workers compensation section of a certificate. The main reason for this is that which employer/policy is primary depends on what the law prescribes. In the construction industry, a sub s employees are entitled to coverage under the sub s policy. As long as the policy exists, there is no need for a certificate given to a general contractor to include the primary language. It s only purpose would be to make the sub responsible for reimbursing the general or its workers compensation insurer if the sub had no workers compensation policy. In addition, there is no need for the noncontributory wording since the employees are only entitled to statutory benefits and would have no need to collect such benefits under more than one policy. As a general E&O rule, when language like this appears in a contract, it should never be added to a certificate. Wording like this on a certificate of insurance has no force or effect whatsoever other than to create a potential E&O exposure for the agent/broker if the policy is not endorsed to provide the "certified" coverage. As discussed elsewhere in this paper, such modifications of certificate wording may be illegal in some states, inappropriate as outlined in some agency/company agreements, or otherwise a very bad idea. Any time a non-acord certificate is requested, the insurer needs to issue the certificate or otherwise authorize it. Waiver of Subrogation Contracts will often stipulate that the right of subrogation must be waived. The CGL only restricts waivers of subrogation after a loss. It does not restrict waiving subrogation before a loss (written, oral, or implied). Specifically, the policy language in the 2004 CGL says: Transfer Of Rights Of Recovery Against Others To Us If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring "suit" or transfer those rights to us and help us enforce them. In addition, it is generally accepted that insurers cannot subrogate against their own insureds except in rare instances such as intentional losses. Thus, additional insured status possibly grants some degree of insulation from subrogation after loss. However, to fully comply with some contractual requirements, it may be necessary to attach ISO form CG Waiver of Transfer of Rights of Recovery Against Others To Us which amends the condition above by adding the following language:
19 CONTRACTUAL INSURANCE REQUIREMENTS Page 19 We waive any right of recovery we may have against the person or organization shown in the Schedule above because of payments we make for injury or damage arising out of your ongoing operations or "your work" done under a contract with that person or organization and included in the "products-completed operations hazard". This waiver applies only to the person or organization shown in the Schedule above. Workers compensation waivers typically must be endorsed to the policy and they must be in writing according to the workers compensation endorsement (e.g., the NCCI WC , Workers Compensation Waiver of Our Right to Recover From Others endorsement). If a contract requires a full waiver of subrogation, it is advisable that the agent not indicate compliance on the certificate of insurance unless authorized to do so in advance by the insurer based on policy language. In addition, some state statutes require the attachment of an endorsement even though the policy grants waivers prior to loss. For a much more detailed (3,000 words) article on waivers of subrogation, including a discussion of waivers in property, auto, and workers compensation, check out this article on the Virtual University: Waivers of Subrogation Notice of Cancellation A certificate holder will often request that notice be provided of cancellation. Typically the request is for 30 days (or more) notice. For example, here is some wording from a lease agreement: All policies of Tenant s Insurance shall contain endorsements that the insurer(s) shall give Landlord and its designees at least 30 days notice of any cancellation, termination, material change, or lapse of insurance. No common commercial policy grants this type of broad notice and use of the term All policies is overly broad in that it could be construed to apply even to auto policies in which the landlord would have no interest. As a practical matter, most additional insured endorsements don t extend a right of notification of cancellation, much less a right of notification of a material change. Under an ISO Commercial Package Policy, notice of cancellation is only required to be provided to the First Named Insured. In addition, unless state statutes specify otherwise, the insurer normally only has to provide the First Named Insured with 10 days notice of cancellation for nonpayment or 30 days for other valid reasons. If cancellation notice is essential, then in lieu of additional insured status, the party requesting the certificate could ask the insured to obtain an Owners & Contractors Protective (OCP) policy. Also, it should be noted that some carriers do offer special proprietary endorsements to comply with cancellation requests such as one insurer s Designated Entity Earlier Notice of Cancellation/Nonrenewal Provided by Us endorsement. This endorsement provides for notice of cancellation, nonrenewal, or material limitation in coverages for a specified number of days in advance for any statutorily permitted reason other than nonpayment of premium.
20 CONTRACTUAL INSURANCE REQUIREMENTS Page 20 Pressure is frequently brought to bear against insurance agents for endorsements that cannot be issued. Consider the following scenario. A subcontractor has to provide proof of CGL insurance to a general contractor in the form of a proprietary certificate that says the issuing company will provide the general with 45 days notice of cancellation for any reason. None of the agent s companies will provide such notice since it is more than that given to the named insured and the policy requires that only the first named insured be notified of cancellation. In fact, it is likely that no admitted insurer in the state will grant such notice. When the agent advises the subcontractor of this, the sub contacts the general who advises the sub that he will not be given the job unless the certificate is issued to the general and that the general knows of at least two other agents who can/will do this. When the sub advises the agent of this, the agent issues the certificate. When the policy is cancelled for nonpayment, neither the agent nor carrier advise the general contractor. Shortly thereafter, a claim is made or suit is filed against the general contractor for a loss arising from the sub s work. The general now threatens suit against the agent and insurer for failure to notify him of the cancellation so that he could take preventative measures. The agent or insurer might respond that the certificate does not constitute a contract because there was no consideration. The general contractor might respond that the consideration he paid was in providing the subcontractor the job in return for the certificate, which inured directly to the agent and insurer since they would have lost the account if they were unwilling to issue the certificate. There are other potential grounds for claims or suits against agents involving certificates other than purely contractual ones. For example, the ACORD certificates of insurance say that the issuing company will endeavor to provide notice of cancellation to the certificate holder. Various dictionary definitions of endeavor include: to exert oneself to do or effect something; make an effort; strive. a strenuous effort; attempt. a conscientious or concerted effort toward an end; an earnest attempt. to attempt by employment or expenditure of effort. Clearly, endeavor means at least to try and probably to make a significant effort to do something. In the case of many or most insurers today, there is no intent to provide any notice of cancellation. Therefore, why should there by any indication on the certificate of cancellation notice when none is required by the policy nor otherwise intended by the insurer? It raises the question as to the ethics and professionalism of the party making such a statement not to mention their potential legal liability. The we will endeavor to certificate of insurance cancellation provision introduced in 1976 was pertinent in the days that insurers routinely notified certificate holders. Today, this is the rare exception, not the rule, and it raises the question of whether the cancellation provision should be stricken completely from the ACORD forms.
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