Acord 25 Certificate of Liability Insurance has Changed-For Better or Worse?

ACORD has substantially altered form 25, Certificate of Liability Insurance, the most widely used and contentious ACORD certificate form. The new version, ACORD 25 (2010/05), removes some of the unrealistic statements contained in the older forms and prominently emphasizes the limited value of the certificate, but it is still a long way from meeting a risk manager’s hopes. The changes involve both style and substance. A key change is in the cancellation wording. The old wording read: SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE EXPIRATION DATE THEREOF, THE ISSUING INSURER WILL ENDEAVOR (emphasis added) 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 The new wording is: SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE EXPIRATION DATE THEREOF, NOTICE WILL BE DELIVERED IN ACCORDANCE WITH THE POLICY PROVISIONS

The new wording matches the reality of insurance practice. To say that the word “endeavor” in the prior wording is misleading is an understatement. Fifty years ago insurers did try to send cancellation notices to certificate holders and, in many cases, notices were actually sent. However, for the last 20 years or more the word “endeavor” has been totally disregarded. Not only do insurers make no effort to send notices, they no longer have copies of the certificates that producers have issued so they’re unable to send notices even if they want to.

Unfortunately, the new wording is far from a model of clarity. Knowledgeable insurance practitioners know that policy wording in most cases says that only the first named insured must receive notice of cancellation. (You knew that, right?) So not only do additional insureds have no rights to notice of cancellation, but even named insureds other than the first named insured don’t receive notices. The theoretical solution is to amend the policy to require that the additional insured be notified. In practice, that almost never happens. Therefore, why not spell it out so that the consumer can understand it? The certificate should say: “Only the first named insured will receive notice of cancellation unless the policy provides otherwise.” Even better, insurance companies should agree to send notice of cancellation. A requirement that the additional insured be notified is a common provision in many contracts. This creates a major source of aggravation for agents and brokers trying to comply with the terms of contracts their insureds have signed. This is a problem that insurance companies can solve. One insurer, the United Fire Group of Cedar Rapids, Iowa, has set-up an automated procedure to notify additional insureds of cancellation or material change in the policy.1 (United Fire Group’s operations are centered in the Mid-West, but it now has a presence in our area via its purchase of Mercer Insurance Group at the beginning of this year. Mercer is licensed in six states, which include New Jersey where it has numerous agents. The endorsement is not yet available on Mercer policies, but United Fire hopes to introduce it in the near future.) The most disputes about certificates of insurance occur when the certificate does not agree with the policy. For example, suppose the certificate detailing ABC Corp.’s insurance coverages shows XYZ Corp. as an additional insured. ABC’s policy contains the ISO automatic Additional Insured provision (CG 20 34 07 04), which provides additional insured status only when required by written contract between the parties. The contract between ABC and XYZ was never signed—a not uncommon occurrence. Is XYZ an additional insured on ABC’s policy? The new certificate spells out the answer. It gives top-billing to statements setting out the limitations of the certificates. The top of the page says, in bold all caps:

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.

Immediately under that the certificate says:

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). So the chances are that XYZ is not an additional insured despite the wording in the certificate.

An interactive panel discussion of commercial liability claim problems at the CPCU Annual Meeting in October included one with an interesting twist on this situation. Suppose the erroneous certificate was issued by an agent of the insurance company? Does that bar the insurance company from enforcing the policy’s wording? The panel’s consensus was: the policy prevails—no additional insured status for the certificate holder although some courts have held otherwise. Other problems with certificates:

• The policy contains non-standard endorsements that, for example, limit coverage to the classifications shown in the policy declarations.

• The policy does not contain a standard coverage such as completed operations. These and similar situations have generated disputes between the certificate holder and the insurer, agent, or broker. In most cases, courts have decided against the certificate holder. (I referred to one case in my article in the October 24, 2011 issue of the Insurance Advocate.2)

IS THERE A SOLUTION?

My solution is for the insurance industry to move into the 21st century and make the certificates do what certificateholders want. Insureds are computer-literate. Let the additional insured issue the certificate on-line. Many agents already do this as do some insurance companies3. Insurers should provide additional insured status automatically when requested by the insured and provide a list of the forms attached to the policy and a link to a website with copies of the forms. For policies that restrict coverage to classifications named in the policy, that restriction and the classifications covered should be shown on the certificate.

In exchange for these benefits, the insurer could impose a charge for the certificate— to be paid on-line by credit card. Even a nominal charge would dramatically reduce the number of certificates. The insurer could also require that the additional insured provide information about the work or activity to be performed by the insured— with a caveat to check the policy forms to be sure that the activity was covered. This would generate useful underwriting data, especially if information about the location and estimated cost of the work were required.

Won’t this be a lot of work for the insurer? Not really—it’s just the type of activity that computers are good at. It will place a burden on the additional insureds to input the data, but they’re the ones that want the information. [