Certificates of dubious value

Millions of certificates of insurance are issued each year, and perhaps no industry routinely requires and uses insurance certificates more than the construction industry. Construction contracts typically require contractors at every level to furnish certificates of insurance to upstream parties with whom they have contracted; building owners require certificates of insurance from their general contractors, and general contractors require certificates of insurance from their subcontractors. Subcontractors should similarly require certificates of insurance from sub-subcontractors and suppliers.

Given the risks and potential for injuries, losses and damages inherent in construction, having the appropriate insurance should be a prerequisite for every construction project. A certificate of insurance identifies the insurance policies held by the party on whose behalf the certificate is being issued. Insurance brokers and agents issue insurance certificates to owners and upstream contractors to show their clients maintain the insurance required in their construction contracts. The certificate provides basic and important information: types of policies, policy numbers, policy limits and the time periods the policies are in effect.

If additional insured status is requested, as is invariably the case, the certificate also may indicate the certificate holder and others are additional insureds on the policies of the named primary insured party. When entering into a contract with a building owner, it is common for a prime contractor to provide a certificate of insurance to the owner with a notation on the certificate that the owner and, perhaps, the architect are additional insureds. Subcontractors routinely are contractually required to provide certificates of insurance indicating general contractors, owners and architects are additional insureds.

ACORD certificate forms

The most widely used certificate of insurance form with construction projects is ACORD 25—Certificate of Liability Insurance, which contractors and brokers commonly use to indicate general liability, automobile liability and workers' compensation insurance. ACORD is an acronym for Association for Cooperative Operations Research and Development, a New York-based insurance industry member organization composed of insurance companies, brokers, agents and others that develops consensus standards and standard forms.

In addition to the ACORD 25 form, ACORD publishes seven other insurance certificate forms. Three ACORD forms that may be of interest and perhaps should be requested by firms engaged in the construction industry are ACORD 24—Certificate of Property Insurance, ACORD 27—Evidence of Property Insurance and ACORD 28—Commercial Property Insurance. To issue ACORD forms, an insurance broker or agent must be licensed by ACORD.

What is it?

A certificate of insurance is not an insurance policy and is not intended to amend, endorse, add to or in any way alter the insurance policies identified in the certificate or any policy terms. A certificate of insurance is a customary, quick and relatively easy means to indicate a contractor has the insurance policies identified in the certificate. It obviously is far easier to fax or email a one-page certificate of insurance than to scan or copy hundreds of pages of commercial general liability, automobile liability, workers' compensation and umbrella insurance policies. To revise or expand insurance coverage, an endorsement, rider or amendment to the policy must be issued.

In response to claims by certificate holders of inaccurate certificates, the insurance industry has emphasized a certificate of insurance affords no rights to the certificate holder and cannot be used to establish the existence of insurance coverage. The document that determines insurance coverage is the insurance policy. The document that controls the subcontractor's insurance-related obligations to a general contractor or a general contractor's insurance-related obligations to a building owner is the respective construction contract between those parties and is unaffected by the issuance or acceptance without objection of an insurance certificate.

In other words, a subcontractor's certificate of insurance that is inconsistent with the subcontract insurance requirements does not relieve or change the subcontractor's insurance obligations.

A vast majority of court decisions hold a certificate of insurance is not a contract between the certificate holder and insurance company, agent or broker who issued the certificate and by itself is not enforceable. In large part, this is because of disclaimer language commonly included in certificates. The absence of specific consideration paid by the certificate holder is another reason cited by courts to disallow a claim by a certificate holder against an insurance carrier, agent or broker arising from a false or inaccurate insurance certificate.

Of course, the certificate holder would have a breach of contract claim if the party with whom he or she had contracted did not maintain the contractually required insurance or had failed to name the certificate holder as an additional insured when contractually required to do so.

Some problems

It is important to note language inserted in an insurance certificate may not be consistent with insurance policies. Also, a party listed on an insurance certificate as an additional insured may not actually be an additional insured.

Inaccurate certificates sometimes are provided when a contract contains onerous or unusual requirements or a less than reputable broker or agent issues the certificate. For example, a general contractor may require certain language be included in an insurance certificate. Faced with the pressure of furnishing the contractually required certificate to obtain the contract or receive payment, the subcontractor calls upon his or her insurance broker or agent to furnish a certificate that satisfies the contract requirements but may well be at odds with the insurance policy.

The time to confront this problem is before the construction contract is signed. Be sure to have the insurance requirements in contracts you are asked to sign reviewed by your insurance adviser, who should have specific expertise in construction-related insurance, to ascertain all the contract's insurance requirements are satisfied. The construction contract may call for use of insurance forms, such as the CG 20 10 11 85 additional insured endorsement form, that are out-of-date. The contract language and the contractor's insurance should parallel each other, and the certificate of insurance should reflect the insurance held by the contractor.

Additional insureds

To designate additional insured status, a notation on the certificate of insurance indicating an additional insured has been the traditional means to communicate additional insured coverage has been conferred.

However, the general rule is being identified on a certificate of insurance as an additional insured does not by itself confer additional insured status. Determination of additional insured status depends on the insurance policy, including an additional insurance endorsement to the policy. A 2006 decision of the Alabama Supreme Court in Alabama Elec. Co-op Inc. v. Bailey's Construction Company is typical of the general case law.

In this case, the broker delivered a certificate of insurance to an electric co-op indicating it was an additional insured. However, the broker did not take the steps necessary to make the electric co-op an additional insured under the named insured's general liability policy. When there was a construction fatality and claims were filed, the discrepancy between the policy and certificate came to light. The Alabama Supreme Court focused on disclaimer language on the certificate of insurance. In responding to an argument from the electric co-op that it relied on the certificate, the court stated the co-op and its insurers never attempted to review or obtain a copy of the policy or the additional insured endorsement or show the co-op would not have received a copy of the policy had a request been made.

However, there have been some contrary case decisions. In these cases, certificate holders have had some success based on legal theories of apparent authority and promissory estoppel.

The apparent authority theory may apply to obligate the insurance carrier when the insurance certificate is issued by an insurance carrier's authorized agent. The promissory estoppel theory is based on the certificate holder's reasonable reliance on the insurance certificate.

In the 2006 case Santana Row Hotel Partners L.P. v. Zurich American Inc. Co., a federal district court judge in the Northern District of California ruled a tenant sufficiently alleged promissory estoppel based on certificates of insurance naming the tenant as an additional insured under a builder's risk policy sufficient to avoid the insurer's motion for summary judgment. If a certificate includes a disclaimer, the promissory estoppel theory is not likely to be successful.

As an example, assume you retain a subcontractor to remove ballast from an existing roof system. In your subcontract, you require your subcontractor to name you as an additional insured on his or her commercial general liability (CGL) policy and provide you with a certificate of insurance indicating you are an additional insured.

After a claim arises and you call upon your subcontractor's CGL carrier to defend and indemnify you, your subcontractor's CGL insurer says you are not an additional insured even though you have a certificate issued by your subcontractor's insurance broker stating you are an additional insured. Your primary and perhaps only claim is a breach of contract claim against your subcontractor for failing to make you an additional insured.

As a general rule, following the precedent of an oft-cited 1974 Fifth U.S. Circuit Court of Appeals case, United States Pipe & Foundry Co. v. United States Fidelity & Guaranty Co., courts have ruled a certificate holder has no legal recourse against the broker, agency or insurer that issued the false certificate because of the absence of privity of contract. Because there is no contractual privity and no exchange of consideration between the certificate holder and insurer or agency, there is no valid, enforceable contract to support a contract claim by the certificate holder against the insurer or agent based on the false insurance certificate.

The value

Although a certificate of insurance does not guarantee the stated insurance is in place, you still should require certificates from all subcontractors, carefully review each certificate, and check with your subcontractor and the broker or agent issuing the certificate if there are any questions or concerns.

Even if your subcontractor's insurance lapses during the course of a construction project, having received the insurance certificate can help you. In the 2012 case Cordero v. Gulfstream Development Corporation, the Supreme Court of Delaware ruled a general contractor and roofing subcontractor were not liable to provide workers' compensation coverage for an injured employee of a sub-subcontractor of the roofing subcontractor because the general contractor and roofing contractor had obtained valid certificates of insurance from their respective lower-tier contractors at the outset of the job.

In this case, Reuben Cordero was injured July 31, 2008, while working on a construction project in Delaware. Cordero was an employee of Rodriguez Contracting Co. at the time of his injury. Rodriguez Contracting was a sub-subcontractor working for Delaware Siding Co., which was the roofing subcontractor working for the general contractor, Gulfstream Development Corp. Before Cordero was injured, Rodriguez Contracting had provided Delaware Siding with a certificate of insurance stating Rodriguez Contracting had a valid workers' compensation policy from Jan. 4, 2008, to Jan. 4, 2009. However, at the time Cordero was injured, Rodriguez's policy had lapsed.

Because his employer's workers' compensation policy had lapsed, Cordero sought coverage under Delaware Siding's and Gulfstream Development's workers' compensation policies. Under Delaware law, if any entity contracting with an independent contractor or subcontractor obtains a certificate of insurance from an independent contractor or subcontractor, the upstream contractor is not required to cover workers' compensation claims of downstream independent contractor's or subcontractor's employees. Here, Rodriguez Contracting had furnished a certificate of insurance to Delaware Siding before Cordero was injured; therefore, Delaware Siding was not required to cover Rodriguez Contracting's employees' workers' compensation claims.

Delaware law provides that once a contractor has received a certificate of insurance, if the contractor knows or has reason to believe the certificate of insurance has lapsed or become false, the contractor no longer may rely upon that certificate of insurance. In such cases, the contractor has an ongoing, good faith duty to inquire into the independent contractor's or subcontractor's workers' compensation coverage.

But in this case, there was no evidence that either Gulfstream Development or Delaware Siding knew or had reason to believe Rodriguez Contracting's certificate of insurance had become false. Therefore, Delaware Siding had no obligation to inquire into such coverage and was shielded from providing workers' compensation coverage for Rodriguez Contracting's employees because Delaware Siding had obtained Rodriquez's certificate of insurance before Cordero's injury.

Because Delaware Siding had submitted a certificate of insurance to the general contractor, Gulfstream Development also had no obligation to provide workers' compensation applicable to Cordero's claim, eliminating a potential indemnification claim by the general contractor against its roofing subcontractor. Liability rested with Rodriquez Contracting, who had failed to maintain its workers' compensation coverage.

State legislation

Issuing certificates of insurance can be a troublesome task for insurance agencies. It can be time-consuming and labor-intensive and is done without additional compensation. If not handled properly, issuance of insurance certificates creates potential errors and omissions liability exposure for agencies and brokers. The most frequent claims reportedly made against insurance agents pertaining to certificates of insurance are failure to add or improperly identifying additional insureds and misrepresenting coverage.

Lobbying by the insurance industry has resulted in passage of state laws in many jurisdictions intended to address the problem. Texas Senate Bill 424 was prompted by the Independent Insurance Agents of Texas and has been in effect since Jan. 1, 2012. Typical of other state legislation, it requires all certificate of insurance forms be filed with and approved by the Texas Department of Insurance before they can be used. ACORD and other standard forms must be filed with the Texas Department of Insurance and are deemed approved on the date the forms are filed.

An agent issuing a certificate of insurance that has not been approved by the Texas Department of Insurance or has been altered in any way is subject to fines and potential license revocation. Agents and insurers cannot alter or modify a certificate form approved by the Texas Department of Insurance unless the alteration or modification is approved by the Texas Department of Insurance. Agents are prohibited from making any representations on the certificate that are not contained in the underlying insurance policy. As a result, insurance agents in Texas no longer name additional insureds in certificates of insurance unless those additional insureds have been endorsed in policies. Insurance agencies in Texas will not use owner- or contractor-drafted certificate forms unless those forms have been approved by the Texas Department of Insurance but only will use the standard ACORD form.

Diminishing value

Although understandable, the insurance industry's efforts to eliminate liability of insurers, brokers and agents based on a certificate of insurance has had the effect of reducing the certificate's importance. What was once a valued document upon which certificate holders could confidently rely in business transactions between reputable parties has lost much of its usefulness because a certificate holder cannot legally rely on the certificate.

Currently, if a third party wants to be assured the party with whom he or she is transacting business has the contractually required insurance, a complete copy of the other party's insurance policies or at the least the Declaration pages and copies of endorsements showing deviations from standard policy language will need to be obtained and reviewed. Such requests obviously defeat the reason certificates of insurance were developed and gained widespread acceptance.

As more requests are made to insurance brokers and agents to furnish actual policies and Declaration pages, perhaps a revised procedure to ensure integrity in the certificate-issuing process and a revised form that properly balances the need for third parties to be assured the requisite insurance coverage is in place, while not unreasonably expanding the liability of reputable insurance carriers, brokers and agents, can be developed.

Stephen M. Phillips is a partner with Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.

ACORD certificates

In late 2009 and early 2010, ACORD made two significant changes to its insurance certificate forms.

To eliminate any ambiguity as to whether a certificate could be used to establish insurance coverage when there was no actual coverage, ACORD added this disclaimer to the top of the ACORD 25—Certificate of Liability Insurance: "This Certificate is issued as a matter of information only and confers no rights upon the certificate holder. This Certificate does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies below. This Certificate of Insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the Certificate holder."

The ACORD 25 form goes on to state: "IMPORTANT If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed. If SUBROGATION IS WAIVED, subject to the terms and conditions of the policy, certain policies may require an endorsement. A statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s)."

These changes in the ACORD form were intended to eliminate claims based on the certificate of insurance.

The second change made by ACORD in October 2009 was to the provision regarding notice to the certificate holder of policy cancellations.

Years ago, the ACORD form language included a statement that notice of cancellation would be provided to the certificate holder no less than a certain number of days, typically 30, before cancellation. To reduce the liability of agents, brokers and insurers, the language was changed in the 2005 edition of the ACORD forms to this less restrictive provision: "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."

In late 2009 and early 2010, ACORD eliminated the "endeavor" language in all its standard forms. The current ACORD language states: "Should any of the above described policies be cancelled before the expiration date thereof, notice will be delivered in accordance with the policy provisions."

Consistent with the concept that a certificate of insurance is informational only and does not establish or amend any obligations or policy provisions, the current ACORD form would require endorsements to insurance policies providing that notices of cancellation be provided to certificate holders or other third parties because standard liability insurance policies customarily state only the named insured will be notified of cancellation or intent not to renew. Additional insureds are not provided such notice.

ACORD and the insurance industry generally want only current editions of certificate forms to be used and advise that "[i]t is imperative that all ACORD form users use the most current versions of our forms." ACORD advises that earlier editions of its forms should not be distributed. ACORD also advises its member brokers, agents and insurers that they should tell their clients an old edition of an ACORD form may not comply with insurance regulations.