Avoiding Common Insurance Certificate Errors

Insurance Certificates Do Not Alter Insurance Coverage

Contrary to what appears to be a common belief, a certificate of insurance has no bearing on the insurance coverages being represented in the certificate. A certificate of insurance is simply a representation at a point in time of the insurance policies that have been purchased by the party providing the evidence of insurance to the certificate holder.

Insurance certificates are issued by the licensed insurance intermediary who sold the insurance policies on a common copyrighted certificate of insurance template provided by the Association for Cooperative Operations Research and Development (ACORD) organization.

To eliminate any confusion or ambiguity on the relationship between a certificate of insurance and the actual coverage provided under an insurance policy, ACORD provides this advice on its Certificate Frequently Asked Questions (FAQs):

A Certificate of Insurance is NOT an insurance policy, and does not serve to provide, endorse, amend, extend or alter in any way the terms of an insurance policy. Only an endorsement, rider or amendment to the policy can effect changes in coverage. Reference to a contract between the client and a third party on a certificate does not provide coverage.

(ACORD specifically states that the FAQs referenced above on insurance certificates are not legal advice.)

Within the custom and practice in the insurance industry, a certificate of insurance should accurately reflect the insurance policies in place on the date the insurance certificate is issued. However, summarizing an insurance policy that could be hundreds of pages long into a single check-off box necessarily leaves a lot of details on the insurance policies purchased undisclosed in the certificate of insurance.

The person issuing the certificate of insurance takes on potential professional errors and omissions risks when a certificate of insurance materially misrepresents the actual insurance coverage in force, and the certificate holder suffers an uncovered loss that would have been covered by the represented coverage on the certificate of insurance. The standard of care is elevated for the issuer of the certificate of insurance when there are specific insurance requirements in a contract and a specific format that the certificate of insurance must have. This situation is very common in construction contracts that require a contractor to specifically make the stakeholders they are working for additional insureds under the contractor's liability insurance policies and to affirm that those specific parties are additional insureds on the certificate of insurance.

Presumably to avoid professional liability losses on their membership, a few years ago, the Independent Insurance Agents and Brokers of America (IIABA) was influential in getting laws passed in over 45 states that not only make it illegal to issue certificates of insurance that misrepresent the actual insurance policies in place; these laws make it illegal to ask an insurance agent to misrepresent the insurance coverages in place on an insurance certificate. The intent of these new laws on certificates of insurance was to help insurance agents avoid the pressure put on them by unattainable indemnity and insurance provisions in the contracts the insurance agent's customers entered into. To assist insurance agents in complying with these new laws on certificates of insurance, the Independent Insurance Agents and Brokers of America, the IIABA and other groups across the United States conducted intense messaging campaigns and continuing education courses on certificates of insurance.

Misrepresentations on Insurance Certificates Are Still Common

Misrepresentations of the actual insurance coverage in place on certificates of insurance are pervasive in some types of businesses. At American Risk Management Resources Network LLC, we were engaged a few years ago by a client that was interested in evaluating the reliability of its additional insured status under the liability insurance policies purchased by the hundreds of artisan contractors that worked with it. The scope of the insurance review spanned the time before and after the law changes on certificates of insurance and the intense messaging and training pushed by the IIABA and other professional groups. In the review of hundreds of actual insurance policies over 4 years, we observed no differential in the defect rate between the pre- and post-training on certificates of insurance.

Our audit client had a very simple insurance specification in its procurement contract. Although specified in greater detail in the procurement contract, in concept, a vendor contractor working with our client needs to meet these insurance requirements.

1. We want you to be fundamentally insured for what you do for a living.
2. We want you to have a commercial general liability insurance policy and a contractors pollution liability (CPL) insurance policy.
3. We want to be an additional insured on those liability insurance policies, and we want your insurance to be primary and noncontributory to any insurance that we may carry.
4. We want an insurance certificate from you that states you have the basic required coverage.

There is nothing onerous in the insurance specification that would be objectionable by a contractor or its company.

The review of literally hundreds of insurance policies over a number of years revealed a material misrepresentation rate of more than 90 percent on the vendors certificates of insurance provided to our client. A material misrepresentation for our purposes is a deviation between the insurances as specifically referenced in the procurement contract and the insurance as specifically represented on the certificate of insurance. The material coverage defect rate in 9 out of 10 contractors working with our client was observed by comparing:

1. The insurance represented on the certificate of insurance to the insurance required under the procurement contract. In this part of the insurance audit, the insurance certificates provided by the licensed insurance representative represented 100 percent compliance with the insurance requirements in the procurement contract. This makes sense or else the certificate holder (our client) would have rejected the certificate of insurance, and the contractor would not have been able to work for our client. Our client was doing a perfect job of monitoring compliance with its mandatory insurance certificate wording.
2. In the second phase of the audit, we compared the insurance actually provided in the general liability and CPL insurance policies purchased by the vendor contractors against the insurance required in our client's contract. This part of the audit revealed that more than 90 percent of the contractors had insurance in place that failed to meet the insurance requirements in a material way.

Reading between the lines, 9 out of 10 of the insurance certificates provided to our client contained material misrepresentations about the actual insurance coverage in place on the vendor.

The good news is that the problems with misleading insurance certificates are usually easy to fix once the areas of coverage defects are known. Most of the observed defects in insurance certificates could be attributed to the person issuing the insurance certificate either not reading or not understanding the insurance requirements in the contract under which his or her customer was working. In some cases, the issuer's general knowledge of insurance was questionable.

The majority of the observed insurance coverage misrepresentations on insurance certificates fell under two categories: (1) additional insureds and (2) the scope of the environmental insurance coverage.

The problem with materially inaccurate certificates of insurance is particularly acute in the fire and water damage restoration contractor sector. In this type of business, the contractor is usually working for a policyholder who has a claim but may also be required to make parties associated with the claim additional insureds. The additional insured status of the related parties to the claim is usually not perfected if the insured is depending on blanket additional insured endorsements to provide the needed insurance coverage.

Blanket additional insured endorsements provided to contractors usually require that the contractor be working directly for the party seeking to be an additional insured under a written contract or agreement with that party, and the written contract needs to be entered into before the work begins. In the common case of a subcontractor working directly for a general contractor, blanket additional insured endorsements work pretty well to make a general contractor an additional insured on the subcontractor's general liability insurance policy. However, blanket additional insured endorsements tend to fall apart when there is not a direct contractual relationship between and parties seeking to be additional insureds.

The vendor contractors in our insurance compliance audit do not actually perform their operations for our client or for the other parties that also expect to be additional insureds as represented on the certificates of insurance provided by those vendors. So, what happens when the party that expects to be an additional insured in a services contract is not the party for which the contractor is performing work? What if the party that expects to be an additional insured does not have a written contract with the contractor? Most blanket additional insured endorsements do not work at all because the conditions of being an additional insured under the contractor's insurance policy have not been met.

Powerful Additional Insured Tools

The Insurance Services Office, Inc., anticipated the flaws in blanket additional insured endorsements in situations like these and provided the tools to more specifically address the additional insured needs of various parties. Two powerful insurance tools designed for this purpose are the CG 20 10 and CG 20 37 additional insured endorsements. Designed for use by contractors, the 20 10 endorsement addresses the insured's ongoing work, and the 20 37 endorsement addresses an insured contractor's completed operations. Both endorsements contain sections to be completed by the insurance underwriter (not the insurance broker or agent) to define who the additional insured is.

These additional insured endorsements allow for considerable latitude in defining exactly who is an additional insured in a narrative the insurance underwriter completes on the endorsement itself. These endorsements actually change the coverage provided in the insurance policy. Without the completion of these sections, the 20 10 and 20 37 additional insured endorsements do not function at all. There is no automatic coverage provided for additional insureds of any form. It was common in our insurance policy audit to find these endorsements left uncompleted in general liability insurance policies, making the actual coverage for the parties expecting to be additional insureds illusionary.

The ability to actually define who is an additional insured by the completion of these endorsements to the general liability insurance policy corrects for the ambiguity that is inherent in blanket additional insured endorsements when the parties seeking to be additional insureds are not the same parties the contractor is actually performing operations for or is even under contract with.

Environmental Insurance Presents Special Certificate of Insurance Needs

The second area of common insurance coverage misrepresentations on certificates of insurance is on environmental insurance policies. This occurs most frequently when there is a tight insurance specification for environmental insurance that is not met under the actual insurance policy being represented in the insurance certificate.

Environmental insurance is particularly difficult to portray accurately on an insurance certificate because there is no single accepted insurance industry baseline as to what an environmental insurance policy should cover. However, if there were a requirement for a specific type of environmental insurance—for example, CPL insurance with coverage for fungi and bacteria as specifically defined pollutants—a certificate holder being provided with a certificate of insurance showing CPL insurance was in force would be reasonable in assuming the CPL policy in fact provided coverage for fungi and bacteria, especially if the certificate of insurance specifically stated in the description section of the certificate that fungi and bacteria were defined "pollutants."

There is some precedence for the issuers of misleading insurance certificates to be held responsible by the certificate holder that would have been covered if the insurance specification had been met. This situation can easily be avoided through full disclosure in insurance certificates of areas where the insurance in place does not fulfill the insurance requirements in a specific contract or where the insurance policies in place contain restrictions in coverage that a reasonable certificate holder would not expect to be there. If the actual CPL policy in the example above does not have the required fungi and bacteria coverage as stated in the insurance specification, the certificate of insurance should show that deficiency to avoid unanticipated uncovered losses arising from fungi or bacteria.

In our insurance audit example, the vendors working with our client needed to comply with a tight insurance specification that was designed to make it difficult for the vendor to use insurance that fundamentally did not insure them for what they did for a living. There were also specific requirements in the insurance specifications on the needed additional insured status of our client and sometimes the clients of our client that also needed to be additional insureds. Superimposed was a tight specification for CPL insurance and a mandatory certificate of insurance template that affirmed specific coverages were in place on the certificate of insurance.

More than 9 out of 10 insurance programs failed to meet the insurance specifications in the contract in at least one place. The worst audited insurance placement we found failed to meet the insurance specifications five different ways. In all cases, the contractor's insurance brokers and agents still provided our client with a detailed insurance certificate that represented 100 percent compliance with the insurance specifications in the contract.

Staying Out of the Professional Errors and Omissions Trap

Here is how insurance agents and brokers can stay out of the professional errors and omissions traps on insurance certificates.

1. Compare the insurance requirements in contracts with the insurance actually in place.
2. Try to establish who is working for whom when depending on blanket additional insured endorsements. These relationships can be impossible to discern by reading the insurance specifications. For whom are the operations of the insured going to be performed? For whom is the insured contracted to perform work? The answers to these questions are usually only known by the insured. Therefore, the questions need to be asked before the certificate of insurance is produced.
3. If there is any doubt on the additional insured status of a party that expects to be an additional insured, use a more specific additional insured endorsement to achieve that goal.
4. When certifying environmental insurance, it is usually necessary to review all of the policy terms and conditions to ascertain compliance with a tight insurance specification. An actual insurance policy review is necessary due to the absence of industry standardization in environmental insurance policies. Seventy percent of the audited insurance policies in our multiyear study contained material coverage gaps in the insurance coverage interface between the general liability and CPL policies.

Conclusion

Changes in insurance certificate laws in 45 states apparently did nothing to alleviate the chronic misrepresentation rate on certificates of insurance in some artisan contracting businesses. The only way to avoid the insurance certificate trap is for all stakeholders to pay more attention to the insurances required in contracts and the insurances actually in place. The insurance tools to get the coverage to match the representations made in insurance certificates on who is an additional insured and environmental insurance that is fit for the purpose for which it is intended are readily available in the insurance marketplace at affordable pricing. The only difficult part is determining which insurance tools are needed and who needs them.