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Compliance with Contractual Provisions to Procure Insurance: The Illusion of Coverage Provided by Certificates of Insurance

Commercial contracts often require the party with less bargaining power to procure insurance for the party with more bargaining power as a way to shift risk and potential liability. General Contractors often require a Subcontractor’s policy to name the General Contractor as an “Additional Insured.” Lenders often require a Borrower’s policy to name the Lender as a “Loss Payee.”  Landlords sometimes require a Tenant’s policy to name the Landlord as an “Additional Insured.”  A Retailer or Distributor may require a Manufacturer’s policy to name the Retailer or Distributor as an “Additional Insured.” Many parties obtain and rely on “Certificates of Insurance” to demonstrate compliance with such obligations to procure insurance. When a personal injury occurs, property is damaged, a claim is made, and/or a lawsuit is filed, however, parties are shocked when they realize that the Certificate of Insurance actually states: “This certificate is issued as a matter of information only and confers no rights upon the certificate holder.” The Parties are even more shocked when they learn the insurance policy does not provide coverage because the insurer never endorsed the policy to add the contractually required coverage.

This article explains contractual insurance requirements, the illusory coverage provided by Certificates of Insurance, and best practices for a party to ensure compliance with a contractual obligation to procure insurance.

Contractual Insurance Requirements: What are They?  

Contractual requirements to procure insurance coverage, which are standard in most commercial contracts, aim to contain and shift liability for risks associated with doing business with others. These provisions often require the party performing services, providing goods, or incurring debt under a contract to procure coverage for the other party, i.e. the General Contractor, Lessor, or Distributor. [i]Associated contractual provisions outline the type and limit of coverage required.

The following are two examples of specific contractual insurance requirements.  A construction contract may require the subcontractor to add: “[General Contractor] as Additional Insured, including products and completed operations (Form CG 20 10 11 85 or equivalent must be attached to certificate).”  A promissory note may require the borrower to name “Secured Party as (i) loss payee for the property damage coverage.”

Certificates of Insurance: I Have One, What Does It Mean?

A Certificate of Insurance is intended to verify basic facts regarding a Named Insured’s available insurance coverage, such as the effective dates of the policy, coverages provided, and limits. A Certificate of Insurance, however, is not part of the insurance contract, cannot contradict the terms of the actual insurance policy,[2] and does not create a contractual relationship between the insurer and any alleged Additional Insured or Loss Payee.[3] Most importantly, an entity is not an Additional Insured simply because a Certificate of Insurance identifies the entity as such. Rather, the policy, or an Endorsement thereto, must identify an entity as an Additional Insured or Loss Payee.[4]

Specifically, the most recent Certificate of Insurance[5] form issued by ISO[6] includes the following statements:

  • 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.
  • IMPORTANT: 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).

In no uncertain terms, the Certificate of Insurance does not actually add any entity listed therein as an Additional Insured or Loss Payee, or change the policy in any way.

Entity’s Insured Status: How Do I Confirm Whether an Entity Has Been Added to an Insurance Policy? 

An entity is covered under a policy only if an insurer issues an Endorsement that adds the entity as an Additional Insured or Loss Payee. An insurance policy is comprised of the declarations, forms, and endorsements.  The Declarations list the forms and endorsements that comprise the policy.  The forms are often standard forms issued by ISO, such as “Commercial Property,” “Commercial General Liability,” and “Common Policy Conditions.”  And, the Endorsements often add other entities as Additional Insureds. Any coverage form or endorsement not listed in the Declarations is not part of the policy.

There are two primary ways an entity may be added as an insured to an insurance policy:  (1) a blanket endorsement, or (2) a specific endorsement.[7]

A blanket endorsement automatically grants insured status to the category of entities outlined in the Endorsement.[8] For example, a blanket endorsement may provide that all entities that the Named Insured is contractually obligated to add as an Additional Insured are automatically Additional Insureds.[9] The potential drawback of relying upon a blanket endorsement is that the language of the blanket endorsement is open to the interpretation of the insurer and may, for a reason unforeseen at the time of contracting, lead to a denial of coverage for the purported Additional Insured.[10]

A specific Additional Insured endorsement is used to add coverage for specific Additional Insureds by name.[11] Again, however, the coverage afforded to the specifically-named Additional Insured depends upon the language of the endorsement itself.  If an Additional Insured is added to the policy because of a contractual requirement, then the language of the contract requiring coverage should guide the language of the endorsement. Unfortunately, this is not always the case.

Contractual Compliance: If the Certificate of Insurance Does Not Confirm Coverage, Then How Can I Confirm Coverage and Contractual Compliance? 

Whether you are the party obligated to procure additional insurance or the party entitled to be named as an Additional Insured or Loss Payee, it is in the best interests of all parties to ensure compliance with the insurance requirement. Failure to procure the required insurance exposes the breaching party to a breach-of-contract action and exposes the expectant insured to either no or less insurance coverage.

You may ensure compliance with insurance requirements by implementing the following three steps as best practices:

  1. Never accept or rely upon a Certificate of Insurance as proof of Additional Insured or Loss Payee status.
  2. Always demand two documents to verify compliance and coverage: 
    1. the Endorsement that ostensibly provides coverage to the expectant insured; and
    2. the Declarations to confirm the Endorsement was actually added to the policy.
  3. Ask an attorney to analyze the insurance required by the contract or lease, and all pertinent insurance policy provisions to confirm compliance with the contractual insurance requirements.

[i] Often, but not always, this is the party with more bargaining power requiring the party with less bargaining power to procure specific coverage.

[2] See Cont’l Cas. Co. v. Signal Ins. Co., 119 Ariz. 234, 580 P.2d 372, 376 (App. 1978) (a Certificate “cannot contradict the terms of a policy; it only provides information as to the policy’s contents.”).

[3] 3 Couch on Ins. § 40:31(June 2016 Update). Indeed, some courts have noted that Certificates of Insurance are so unreliable that some commentators have coined the term “fictitious insured syndrome” to refer to the many problems created by Certificates. 

Certificate holders are often listed as [AI]s on certificates without the policy actually being endorsed to reflect that intent.  [One example] that often occurs is for a copy of an [AI] endorsement to be attached to the certificate but not the policy. This practice may not provide [AI] status and, thus, is sometimes called the ‘fictitious insured syndrome.’  Sometimes this problem stems from a lack of communication. The insurance agent, for example, may have the authority to add another party to a policy as an [AI] and may issue a certificate indicating that this has been done while forgetting to ask the insurer to issue the endorsement. When the insured later seeks protection, the insurer denies protection, shifting the blame elsewhere.  This, of course, is really a matter of principal-agency liability and should not detrimentally affect the certificate holder.

Marlin v. Wetzel Cnty. Bd. of Educ., 569 S.E.2d 462, 471 (W.Va. 2002) (quoting Donald S. Malecki, et al., The Additional Insured Book 341 (4th Ed., 2000)).   

[4] 3 Couch on Ins. § 40:31(June 2016 Update).

[5] See the attached Sample Certificate of Insurance for one of the most recent forms.

[6] Insurance Services Office, Inc. (“ISO”) is an organization that collects statistical data, promulgates rating information, and develops standard insurance policy forms.

[7] For a general list of the types of additional insured endorsements, please see: Scott P. Pence and Wm. Cary Wright, “Not All Additional Insured Endorsements Are Created Equal: Brief History of ISO’s Additional Insured Endorsements and 2013 Changes,” Under Construction Newsletter, Vol. 15 No. 3, Aug. 2013, http://www.americanbar.org/publications/under_construction/2013/august_2013/iso_additional_insured_endorsements.html

[9] See Form CG 20 33 07 04 (providing Additional Insured status when required by a written contract for parties in contractual privity).

[10] See Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 151 P.3d 538 (Ariz. Ct. App. 2007) (finding that general contractor was not an additional insured under subcontractor’s policy because the language of the contract did not specifically require additional insurance); see also KB Home Tucson, Inc. v. Charter Oak Fire Ins. Co., 236 Ariz. 326, 340 P.3d 405 (Ariz. Ct. App. 2014) (examining whether there was an “executed written agreement” such that the contractor qualified for additional insured coverage pursuant to the terms of the blanket additional insured endorsement).

[11] An endorsement naming a specific entity will generally have the same language as a blanket additional insured endorsement. The difference is that the schedule in the endorsement will have the specific entity listed, rather than the blanket category of entities listed.

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