Does your company deal with certificates of insurance? Are you aware of the regulatory and contractual issues associated with certificates of insurance? Are you aware of ways to manage certificates of insurance? Did you know that you can use certificates of insurance to prove the existence of coverage? This blog will discuss certificates of insurance and the important role they play in business and in the insurance industry.
by Lori Siwik, Founder and Managing Partner at SandRun Risk and Rich Sobek, Senior Vice President Global Risk at Oswald Companies.
Certificates of insurance play an important role in the insurance industry and business. They play a role in demonstrating insurance coverage in business contracts, and they play a role in proving missing policies when companies are addressing liabilities that arise from historic operations. The following discusses certain regulatory issues with insurance certificates, managing certificates of insurance associated with business contracts, and using certificates of insurance to prove historic insurance coverage.
Regulatory and Contractual Issues
Many stakeholders are unaware of the regulatory and contractual issues associated with the use of certificates. Most state insurance departments issue specific guidance on how certificates are to be prepared. Texas offers the most detailed guidance on certificate issuance of any individual state, while others (including Ohio), specify that regulations apply to both issuers and those who request certificates. For example, Texas forbids any reference within the certificate to any insurance requirement in a contract other than the underlying insurance contract.
Aside from state regulations, most certificates of insurance are issued on forms published and copyrighted by ACORD, a global standards-setting body for the insurance industry. Carriers and agents enter into a contract with ACORD to use their forms and agree to abide by strict rules for usage. Regardless of the business pressures placed upon the issuer, the agent must abide by state and ACORD rules and regulations or risk state licensing; their failure to comply risks insurance license status, their ability to contract with ACORD, or direct damages in the form of “errors and omissions” liability.
Managing Certificates of Insurance
An organization named as an Additional Insured on a contractor’s policy normally receives only a certificate to verify their status. A certificate holder must verify that this certificate includes coverages required in the underlying contract, store the information (sometimes for many years), and follow up on renewal certificates upon expiration. Larger organizations hiring many contractors often delegate this task to someone at an administrative level, who may not have the knowledge base to decide whether the certificate is compliant.
Some organizations have purchased stand-alone software to assist with the tracking, while others have decided to outsource the entire process to third parties. ISNetworld is one example of an organization that provides people and technology to assist with the process, including a platform accessible by organizations hiring contractors, plus the individual contractors and their agents. Outsourcing of this process is a growing trend in the industry.
Using Certificates of Insurance to Prove the Existence of Coverage
Policyholders can utilize their historic insurance policies to obtain coverage for their asbestos and environmental liabilities. Many policyholders face a problem with doing that, however. The problem? They have no idea where those historic insurance policies are. Consulting firms that provide insurance archaeology services, like SandRun Risk, can be
retained to locate the historic coverage. Even when the actual policies cannot be found, insurance companies and the courts often accept secondary evidence as proof of the policy terms and address the claim based on that evidence.
The Rules of Evidence permit policyholders to prove insurance coverage through secondary evidence. After demonstrating (1) that the policyholder has conducted a diligent search for the policy, (2) that the policy was lost or destroyed, and (3) that the loss or destruction was not in bad faith, the policyholder must prove the existence and material terms and conditions of the policy. Burt Ridge Box, Inc. v. Travelers Property Casualty Corp., 302 F.3d 83 (2 nd Cir. 2002); United States v. McGaughey, 977 F.2d 1067 (7 th Cir. 1992). Many courts require that the policyholder prove the identity of the named insured, the policy term, the type of coverage and the limits of coverage. Bell Lumber and Pole Co. v. United States Fire Insurance Co., 847 F. Supp. 738 (D. Minn. 1994).
Assuming that the above evidentiary principles are met, secondary evidence of the missing policies may be introduced. There is a wide array of secondary evidence that can be utilized. Certificates of insurance submitted to third parties that conduct business with the policyholder are one form of secondary evidence often relied upon to demonstrate the existence of coverage. MAPCO Alaska Petroleum v. Central Nat’l Ins. Co., 795 F. Supp. 941 (D. Alaska
1991). Courts recognize that the very purpose of certificates of insurance is to provide proof of insurance to third parties with whom the policyholder is doing business. National Union Fire Ins. Co. v. Mid-Century Ins. Co., 2016 CA Sup. Ct. Motions LEXIS 19172 (Feb. 15, 2016). They routinely rely upon secondary evidence of policies, such as certificates of insurance, in cases involving missing insurance policies.
Lost insurance policies are not a bar to coverage. With a diligent search, insurance policies, or secondary evidence of them in the form of certificates of insurance among other types of secondary evidence, can be used to demonstrate the coverage exists for the claim or claims at hand.
Conclusion
Certificates of insurance are important pieces of paper for a variety of reasons. Understanding the value they provide, the regulatory requirements, and the role they play in business dealings and in the insurance industry will assist policyholders in managing them in their companies.
Regulatory and Contractual Issues
Many stakeholders are unaware of the regulatory and contractual issues associated with the use of certificates. Most state insurance departments issue specific guidance on how certificates are to be prepared. Texas offers the most detailed guidance on certificate issuance of any individual state, while others (including Ohio), specify that regulations apply to both issuers and those who request certificates. For example, Texas forbids any reference within the certificate to any insurance requirement in a contract other than the underlying insurance contract.
Aside from state regulations, most certificates of insurance are issued on forms published and copyrighted by ACORD, a global standards-setting body for the insurance industry. Carriers and agents enter into a contract with ACORD to use their forms and agree to abide by strict rules for usage. Regardless of the business pressures placed upon the issuer, the agent must abide by state and ACORD rules and regulations or risk state licensing; their failure to comply risks insurance license status, their ability to contract with ACORD, or direct damages in the form of “errors and omissions” liability.
Managing Certificates of Insurance
An organization named as an Additional Insured on a contractor’s policy normally receives only a certificate to verify their status. A certificate holder must verify that this certificate includes coverages required in the underlying contract, store the information (sometimes for many years), and follow up on renewal certificates upon expiration. Larger organizations hiring many contractors often delegate this task to someone at an administrative level, who may not have the knowledge base to decide whether the certificate is compliant.
Some organizations have purchased stand-alone software to assist with the tracking, while others have decided to outsource the entire process to third parties. ISNetworld is one example of an organization that provides people and technology to assist with the process, including a platform accessible by organizations hiring contractors, plus the individual contractors and their agents. Outsourcing of this process is a growing trend in the industry.
Using Certificates of Insurance to Prove the Existence of Coverage
Policyholders can utilize their historic insurance policies to obtain coverage for their asbestos and environmental liabilities. Many policyholders face a problem with doing that, however. The problem? They have no idea where those historic insurance policies are. Consulting firms that provide insurance archaeology services, like SandRun Risk, can be
retained to locate the historic coverage. Even when the actual policies cannot be found, insurance companies and the courts often accept secondary evidence as proof of the policy terms and address the claim based on that evidence.
The Rules of Evidence permit policyholders to prove insurance coverage through secondary evidence. After demonstrating (1) that the policyholder has conducted a diligent search for the policy, (2) that the policy was lost or destroyed, and (3) that the loss or destruction was not in bad faith, the policyholder must prove the existence and material terms and conditions of the policy. Burt Ridge Box, Inc. v. Travelers Property Casualty Corp., 302 F.3d 83 (2 nd Cir. 2002); United States v. McGaughey, 977 F.2d 1067 (7 th Cir. 1992). Many courts require that the policyholder prove the identity of the named insured, the policy term, the type of coverage and the limits of coverage. Bell Lumber and Pole Co. v. United States Fire Insurance Co., 847 F. Supp. 738 (D. Minn. 1994).
Assuming that the above evidentiary principles are met, secondary evidence of the missing policies may be introduced. There is a wide array of secondary evidence that can be utilized. Certificates of insurance submitted to third parties that conduct business with the policyholder are one form of secondary evidence often relied upon to demonstrate the existence of coverage. MAPCO Alaska Petroleum v. Central Nat’l Ins. Co., 795 F. Supp. 941 (D. Alaska
1991). Courts recognize that the very purpose of certificates of insurance is to provide proof of insurance to third parties with whom the policyholder is doing business. National Union Fire Ins. Co. v. Mid-Century Ins. Co., 2016 CA Sup. Ct. Motions LEXIS 19172 (Feb. 15, 2016). They routinely rely upon secondary evidence of policies, such as certificates of insurance, in cases involving missing insurance policies.
Lost insurance policies are not a bar to coverage. With a diligent search, insurance policies, or secondary evidence of them in the form of certificates of insurance among other types of secondary evidence, can be used to demonstrate the coverage exists for the claim or claims at hand.
Conclusion
Certificates of insurance are important pieces of paper for a variety of reasons. Understanding the value they provide, the regulatory requirements, and the role they play in business dealings and in the insurance industry will assist policyholders in managing them in their companies.
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