Myth #5: Certificates Of Insurance Add Additional Insureds

There has been so much going on lately that I have not had a chance to get back to my installment series, “Top 10 Commercial Insurance Myths & Misconceptions”.  To recap, we have covered #1-4:

1.  Your Business Is “Fully Covered”.
2.  Policy Forms Are “Standard” And Cannot Be Negotiated.
3.  Fraud Claims Are Not Covered.
4.  Deductibles And Self-Insured Retentions (“SIRs”) Are The Same Thing.

Today we cover #5: Certificates Of Insurance Add Additional Insureds.

It is a common occurrence in commercial contracts such as leases, construction agreements, and product distribution agreements to require a business partner to add your company as an additional insured to the partner’s liability policies.  The additional insured coverage clause is typically paired with an indemnification provision.  The additional insured coverage serves an important role in backing up the indemnity promise and providing a source of indemnification in the event the counterparty is insolvent or otherwise unable or unwilling to provide indemnification.

Although companies recognize the importance of additional insured coverage, they often are derelict in confirming that additional insured coverage is in place prior to the occurrence of a loss.  Frequently, at the end of a contract negotiation, a company lawyer or risk management professional will simply collect certificates of insurance and stick them in a file.  When a loss occurs, the company pulls out its certificates of insurance and makes an additional insured claim.

Increasingly, insurers are denying additional insured coverage claims based on a variety of reasons, including recent restrictions placed on the scope of the coverage.  It is also common for insurers to deny additional insured tenders because the insurer has no record that a party has been added to the policy, even though that party is holding a certificate of insurance that says it is named as an additional insured.

How can that be?  The reason is that, in most circumstances, certificates of insurance do not add additional insureds.  In fact, certificates of insurance do not confer any rights at all to the certificate holder.  The more recent versions of the certificate of insurance form, created by a company called ACCORD, specifically states that the certificate is issued as a “matter of information only,” confers no rights, and does not  “amend, extend or alter coverage.”  In other words, the very document that most companies are relying on to confirm that they have additional insured coverage rights explicitly states that the certificate has no legal significance.

Most courts enforce this disclaimer language and hold that a certificate of insurance does not evidence the existence of additional insured coverage.  For example, in a recent federal decision out of the Middle District of Florida, the court held that a certificate of insurance could not be relied upon to establish additional insured coverage because the certificate was not issued by the insurer and specifically stated that it did not confer any rights on the certificate holder.  See DTG Operations, Inc. v. Manheim Remarketing, Inc., et al., No. 6:10-cv-835, 2010 U.S. Dist. LEXIS 84854 (M.D. Fla. Aug. 18, 2010).  New York caselaw is in accord.  See, e.g., Sixty Sutton Corp. v. Illinois Union Ins. Co., 34 A.D.3d 386, 825 N.Y.S.2d 46 (N.Y. App. Div. 2006).

Because certificates of insurance typically are issued by insurance agents, not insurance companies, the information provided in the certificate of insurance does not bind the insurer, unless the insurance agent is also an agent of the insurer (as may be the case with captive agents, as opposed to independent agents).  In limited circumstances, promises contained in a certificate of insurance can bind the insurer if the certificate is issued by the insurer or by a broker with actual, implied, or apparent authority to bind the insurer.  See, e.g.,  Niagara Mohawk Power Corp. v. Skibeck Pipeline, 270 A.D.2d 867, 705 N.Y.S.2d 459 (N.Y. App. Div. 2000); Lenox Realty v. Excelsior Ins. Co., 255 A.D.2d 644, 679 N.Y.S.2d 749 (N.Y. App. Div. 1998).  Compare to Florida Statutes Section 627.402(1), which defines an insurance “policy” to include a “certificate thereof,” allowing a certificate holder to use the certificate to create coverage rights if the certificate is issued by an agent of the insurer.

In many instances the certificate of insurance is issued hastily by a broker who may not carefully review the policy, or understand the legal interplay between the policy terms and the indemnification agreement.  Too frequently, the certificate of insurance contains inaccurate information, and may state that certain parties are additional insureds or loss payees when they do not legally hold this status.

If the erroneous certificate is issued by an independent insurance agent, then at best the party relying on the certificate may have a claim against the negligent broker.  Some brokers attempt to avoid liability by listing a company as a “certificate holder,” rather than an additional insured, on the certificate of insurance.  Companies that do not read the certificate of insurance carefully may be filing away a piece of paper that does nothing more than inform the company that it is the “holder” of a worthless certificate.  To paraphrase Macbeth, the certificate is full of policies and promises, signifying nothing.

So, how do companies confirm, prior to a loss, that they have additional insured coverage?  The best practice is to request a complete copy of the counterparty’s insurance policy or insurance binder, if the policy has not yet been issued, before performance under the contract commences.  The company should have someone knowledgeable review the policy in conjunction with the contract language to ensure that additional insured coverage has been secured.  This review creates some additional up front work, but it is the only way that companies can be assured that the promised coverage has been secured.