Certificates of Insurance in the News Again
Certificates of Insurance in the News Again
Certificates of insurance are a sore point with both those who ask for them and those who have to provide them. On the one hand, the requests sometimes ask for the impossible and the other, the certificates often don’t enable the certificate-holder to detect serious gaps in coverage.
Agent associations and others have been fighting the first part of the problem by pushing for state administrative or legislative action to make it illegal to ask for expansion of coverage via a certificate of insurance. Risk managers have been pushing for more information on what coverage is provided by the policies underlying the certificate of insurance. There are new developments on both fronts.
A recent change in Delaware gives producers in that state protection from the sometimes overreaching requirements imposed by some contracts. Its legislature just passed a law championed by the Delaware IABA making it unlawful to:
• Request a certificate that does not accurately reflect the underlying policy;
• Issue a false or misleading certificate or one that purports to alter, amend or extend the coverage provided by the insurance policy;
• Use a certificate to warrant that a policy complies with the insurance or indemnification requests of a contract. 1
The most interesting feature of this law is that it makes it unlawful to request or issue an inaccurate certificate. A few other states have similar laws, but in most states the insurance departments only bar insurers or producers from misrepresenting or altering coverage in a certificate of insurance. Without legislative authority, the departments don’t have the power to make requesting such changes illegal.
Responding that it’s illegal for the client to request and the producer to comply is a better argument against providing certificates with expansive wording than just saying it’s illegal for the producer to do it. Under Delaware law, not only would the agent be violating the law, but so would the owner or contractor who requested it.
In their 2013 legislative sessions, the New York Assembly and Senate passed legislation that would have been even more forceful than Delaware’s. It would have outlawed demands for wording that would:
• change the policies;
• require insurance producers to certify coverage;
• use certificates as warrantees of coverage; and
• require certificates that misstate coverage.2
However, Governor Cuomo vetoed the bill. In his veto message he wrote: “State agencies frequently require…certificates of insurance that convey detailed information sufficient to ensure that their insurance policies meet the specific liability and other coverage requirements under a given State contract. The standardized forms mandated in this bill, however, are generic in nature and will not convey such detailed policy coverage information.”
At the moment, various opinion letters issued by the New York Department of Financial Services and its predecessors ban producers from amending or altering certificates. For example, the NY Insurance Department Office of General Counsel wrote in an opinion letter issued 1/31/11 that: “A licensed insurance agent or broker may not complete a certificate of insurance that effectively amends, expands, or otherwise alters the terms of the applicable insurance policy.”3
This has placed producers in a terrible position. Various state agencies and others contractually require certificates of insurance with wording that the producer is barred from providing. Often the producer’s client can’t get a job and/or get paid for work done without the certificate. To the client, the producer is the stumbling block. And if another producer is willing to flout the law, there goes the producer’s client.
The situation in our neighboring states, NJ, CT, MA, and PA is similar. Either by law or by ruling, the insurance departments in those states bar producers from changing certificates, but do not bar others from demanding it.4
From a risk management perspective, to protect themselves and their insurance claims record, property owners, governmental bodies, and general contractors insert provisions in their contracts requiring contractors to carry specific insurance, to add the party retaining them as an additional insured and to hold that party harmless from claims and lawsuits.
Unfortunately insurance policies issued to many New York contractors have severe limitations of coverage that greatly reduce the coverage, but those limitations aren’t shown on the certificates. There have been numerous decisions by New York courts enforcing exclusions that are not standard ISO exclusions even though the ACORD5 certificate of insurance didn’t show that information.
A case in point is Bayport Construction Corp. v BHS Insurance Agency, decided May 7, 2014. Bayport had contracted with Kiska Group, Ltd. to have work done at its construction project in Brooklyn. Jose Orellana, a Kiska employee, was injured on the job. An injured employee can’t sue his employer, but he can sue anyone else who may be involved in the work and liability awards can far exceed workers compensation payments.
To make such lawsuits even more vexatious, NY Labor Law sections 240 and 241 impose absolute liability in certain situations on owners or general contractors even though the owners or general contractors had little real control over the work. Absolute liability leaves the owner or general contractor with few defenses. The argument comes down to how much the injured party is to be paid.
When Orellana sued Bayport, Kiska’s insurance company argued that the policy excluded claims by the employee of any (emphasis added) insured. Because Bayport, as an additional insured, was an insured along with Kiska on Kiska’s policy, the insurer denied Bayport’s demand for coverage. Bayport thereupon sued the agency that issued the certificate. The court ruled that Bayport was out of luck.6 The agent was out of luck also. Winning an E&O case is a Pyrrhic victory.
A solution for both problems may be in sight. ACORD has developed a new form, New York Certificate of Liability Insurance Addendum 855 NY (2014/05), hereafter “855 NY,” which enables the certificate preparer to list some of the unusual provisions in the policy. At present, most certificate-holders never discover these provisions until it’s too late—the insurance company has rejected the claim. (To avoid problems, some firms demand copies of policies in addition to certificates of insurance, but checking a policy is a labor intensive task requiring specialized knowledge.)
Here are brief details on some of the items in the form:
• Is the insurer admitted in New York, or is it an excess line insurer? If admitted, is the policy written in New York’s free trade zone?
• Is the commercial general liability policy the ISO form, a modification of that form, or some other proprietary form?
• What is the form number of the additional insured endorsement on the policy?
• Does the CGL policy insure the additional insured on a primary and noncontributory basis? Is that the case for the excess or umbrella liability coverage? • Does it cover the additional insured for injuries to employees of the named insured or subcontractors?
• Does the CGL policy restrict or exclude coverage for:
– Certain specific operations?
– Contractual liability by altering the definition of “insured contract”?
– Earth movement; excavation; explosion; collapse; underground property damage?
– Suits by one insured against another?
– Property damage to work performed by subcontractors?
• Does it remove or modify the “insured contract” exception to the employer’s liability exclusion? (Removing or modifying the exception reduces coverage.)
• Does the CGL policy guarantee advance notice to the certificate holder if the insurer cancels it?7
Those who require certificates of insurance for general liability coverage in New York should stipulate that the 855 NY form accompany the certificates. It’s also a good checklist of other items to include in the insurance requirements section of a contract. (If you don’t have a copy of 855 NY, it’s available from ACORD at Acord.org.)
Clients should add a contractual requirement for those items they feel are important. The completed 855 NY form that accompanies a certificate must be examined to see if there are any critical items that need attention. That will be work—but it’s less than checking an entire policy. I’m preparing a checklist for our clients. If you’d like a copy, email me at jtrupin@aol.com.
The coalition that developed 855 NY, which includes producer and industry organizations, representatives of governmental units that request certificates and others has continued to press for action.
The new 855 NY form, which was in the works before the veto, appears to meet the Governor’s objections. As of this writing (6/2/14), new legislation making it illegal to request expansion of coverage via a certificate of insurance has passed the NY State Senate and is working its way through the Assembly. Supporters of the legislation are hopeful that it will pass and be signed by the Governor.8
This won’t close all the gaps for risk managers. For one thing, there can be errors or fraud in the preparation of the 855 NY form—producers’ staff-members don’t always have sufficient skills to accurately prepare the certificate. For another, there’s the basic problem with relying on certificates of insurance: the certificates clearly say that they do not “amend, extend or alter the coverage afforded by the policies” shown in the certificates. 855 NY contains similar language. So, if there’s no coverage in the policy, it doesn’t matter what the certificate says.
When the certificate is prepared by a broker, New York courts, particularly in the First and Second Judicial Departments (New York City boroughs plus Nassau, Westchester, and Suffolk, Rockland, Orange, Dutchess, and Putnam), will usually refuse to enforce coverage shown in the certificate if the coverage is not included in the policy.
When the certificate is prepared by the insurance company or its agent, courts will sometimes enforce the certificate, particularly in the Third and Fourth Judicial Departments (upstate New York counties).9 The use of the new 855 NY form may change the equation and cause courts to impose more responsibility on a broker or agent who misstates coverage. We shall see.
From a risk manager’s point of view it may not be a perfect solution, but it’s a great improvement. 855 NY gives risk managers a chance to examine key points in the coverage they’ve been provided without the need to obtain and review entire policies. They should require it by contract and insist that it accompany the certificate of insurance.
A law barring requests to amend coverage via the certificate of insurance will be welcome relief for producers. It won’t solve all their problems either. For one thing, governmental agencies will still be allowed to use their own certificate forms although it’s hoped that they will accept the 855 NY form instead.
For another, certificate-holders may refuse to accept the certificate because that the 855 NY form indicates that the policy doesn’t meet the requirements of the contract between the certificate-holder and the insured. That may offer the producer the opportunity to tell his or her insured that better coverage is available at a higher premium.
We’ll have to see how this plays out, but at the moment it looks like a fair tradeoff.
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1 Young Ha “Delaware’s New Legislation Adds Teeth to Certificate of Insurance Regulations,” Insurance Journal, March 27, 2014, http://www.insurancejournal.com/news/east/2014/03/27/324525.htm (accessed May 17, 2014)
2 “PIANY, DFS Discuss Legislation to Address Certificates of Insurance Abuse”, PIA Professional Agents Bulletin, January 23, 2014. http://www.pia.org/COMM/news/template.php?s=&nid=7891 (accessed May 30, 2014)
3 State of New York Insurance Department, the Office of General Counsel opinion January 31, 2011, representing the position of the New York State Insurance Department. http://www.dfs.ny.gov/insurance/ogco2011/rg110108.htm (accessed 5/30/14)
4 State of New Jersey Department of Banking and Insurance Bulletin Number 11-04 February 28, 2011, Connecticut Bulletin S-14 November 9, 2010, Joseph G. Murphy (MA), Commissioner of Insurance Bulletin 2011-07; Certificates of Insurance, Evidence of Coverage Forms and Binders, Property and Casualty Insurance Companies and Producers Issuing Certificates of Insurance in Pennsylvania; Notice No. 2009-02 February 14, 2009
5 ACORD (Association for Cooperative Operations Research and Development) is a nonprofit organization serving the insurance and related industries. Among other activities, ACORD facilitates the development of standards and standard forms.
6 Bayport Construction Corp. v. BHS Insurance Agency, et al., Supreme Court of the State of New York, Appellate Division: Second Judicial Department D41462 5/7/14 (The insurance company first said that the policy had been cancelled, but that argument fell by the wayside in view of the exclusion.)
7 “Here Comes the N.Y. Twist on Certificates of Insurance” Ask Tim, April 23, 2014, http://insurancegeek.typepad.com/ask_tim/2014/04/here-comes-the-nytwist- on-certificates-of-insurance.html (accessed 5/30/14)
8 Based on a discussion with Tim Dodge, AU, ARM, CPCU Asst VP of Research IIABNY 6/2/14, however, I’m responsible for this interpretation. 9 Thomas Bower, “Certificates of Insurance: What Every New York Risk and Insurance Professional Needs to Know,” http://www.sacslaw.com /CM/Articles/Articles29.asp (accessed 5/30/14)
