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Risk Management

Evidence of property insurance changes

ACORD makes it clear that the forms are for informational purposes only

By Donald S. Malecki, CPCU

What was developing as a nightmare for producers having to issue Evidence of Property Insurance ACORD 27 and Evidence of Commercial Property Insurance ACORD Form 28 has now become more of a problem to the certificate holders themselves.

Form 27 is designed for someone, other than a party having an insurable interest in property, who wants to know the types of property coverages being maintained by the party being requested to confirm its property coverages.

On the other hand, ACORD Form 28 is designed to give persons and organizations that have a financial interest in the property of others a comprehensive view of the property coverages being provided. Within this category are mortgagees, loss payees, and other lienholders.

For a number of years, those to whom the ACORD Forms 27 and 28 were issued had the best of both worlds, unlike, for example, holders of Certificate of Liability Insurance Form 25 for use in confirming various commercial liability coverages. The reason was that neither Form 27 nor 28 contained a disclaimer stating that they were being issued for informational purposes only and did not amend, extend, or alter the coverages provided. Both also stated that in the event of cancellation, nonrenewal, or material change, the insurer would notify the holder of such forms within a certain number of days.

Then someone developed the bright idea that with both ACORD Forms 27 and 28 not being subject to a disclaimer, they could possibly control the policy’s provisions. This is where producers’ nightmares began. Requests that these forms, particularly Form 27, confirm coverages for liability, auto, and other coverages began to increase.

This created an opportunity for those who unscrupulously try to obtain coverage concessions in whatever way possible. An example of someone in this category is the issuer of a manuscript certificate, without a disclaimer, who states that contractual liability coverage encompasses all liability assumed in the indemnification clause of the contract between the certificate holder and the named insured.

Bad news for lenders

In 2006, the two distinctive characteristics of ACORD Forms 27 and 28 were eliminated. Both forms now state that they are issued as matter of information only and confer no rights upon the additional interest named therein. Like the ACORD Certificate of Liability Insurance Form 25, both Forms 27 and 28 also state that they do not amend, extend, or alter the coverages afforded by the policies as identified.

Equally important is the second amendment of Forms 27 and 28 concerning notice. Instead of promising the holder notice of termination (cancellation or nonrenewal) or material change of coverage, they now state that should any of the policies be canceled, the issuing insurer will “endeavor” to mail written notice to the additional interest so named. Failure to mail such notice, however, is not to be considered an obligation or liability upon the insurer, its agents or representatives.

Not too long after these amendments were introduced by ACORD, a press release was issued by mortgage finance firm Freddie Mac. It stated that the Mortgage Bankers Association, various lenders, and investors have raised concerns over the recent changes with the Evidence of Commercial Property Insurance Form 28 (2006/07).

What these lenders find unacceptable with the latest edition of ACORD Form 28 are the two changes having to do with disclaimers and the “endeavor” to send notice of cancellation.

The press release also stated that in light of this most recent revision, the alternative, effectively immediately, would be to require (1) Form 28 (2003/10), which is the document replaced by the new one; (2) ACORD 75, insurance binder; or (3) insurance policy or duplicate original insurance policy.

A general misunderstanding

What these financial institutions seem to misunderstand in rejecting the latest Evidence of Commercial Property Insurance is that some states require these ACORD forms to be filed with insurance departments, just as is the case with insurance policies. Thus, once the new certificate is approved, the replaced one can no longer be issued.

One also has to wonder why financial institutions were so privileged as to obtain notice of cancellation, nonrenewal, or material change when the only insured who is promised notice of termination is the first named insured. Thus, even if, for the sake of argument, the former Evidence of Commercial Property Insurance were still to be applicable, no notice of cancellation, nonrenewal, or material change should be given by the insurer, since this document is only supposed to confirm what the policy reflects.

With holders of Form 28 not even considered to be insureds, it would seem that an insurer’s promise to give notice of termination or material changes would be a violation of its insurance policy filing where notice is reserved for the first named insured—unless an endorsement has been issued amending this provision.

How the issuance of a binder or a copy of the original insurance policy will give peace of mind to these institutions is an enigma, because neither changes the policy’s provisions. Both will confirm the coverages being provided on the date they are issued, but neither changes any provisions having to do with notice of termination.

Realistically, holders of ACORD 28 still obtain more information than holders of other certificates issued for purposes of confirming both property and liability coverages. This Form 28 not only gives the same information as Form 27 but, unlike this latter one, also provides a comprehensive checklist of such items as whether coverage is being provided for business income, rental value, terrorism, fungus, replacement cost, equipment breakdown, earth movement, ordinance or law, among other coverages.

Financial institutions and other lienholders also need to remember that when they are shown as mortgageholders or as a lender’s loss payable on ISO endorsement CP 12 18, they are promised notice of cancella-tion or nonrenewal, if they meet the conditions precedent itemized in those provisions. Their coverage also remains unaffected even if a claim were to be denied based on the policyholder’s acts or omissions. Thus, when lienholders in these categories also receive the latest Evidence of Commercial Property Insurance with the checklist of coverages, they have the best of both worlds.

The producer’s role

Producers have to be relieved by the fact that both the Evidence of Property Insurance Form 27 and Evidence of Commercial Property Insurance Form 28 now contain a disclaimer. This should eliminate the demands of their insureds to insert the confirmation of liability coverages in these documents.

Unfortunately, the nightmare insofar as producers are concerned is still likely to persist, since they are the ones who are likely to be confronted with most of the complaints by those desiring the issuance of Forms 27 and 28. It may be easier said than done, but they may need to explain that they are operating under ACORD’s directives—meaning they have no authority to revise the documents.

Producers also need to keep in mind that being subject to a disclaimer, neither Evidence of Property Insurance Form 27 nor Evidence of Commercial Property Insurance Form 28, like Certificate of Liability Insurance Form 25, can amend the policy. They are to be used solely to confirm what the policy reflects and nothing more!

On a more positive note, producers should check with their underwriters to determine if an endorsement can be issued amending the policy’s notice condition so that the one to whom a certificate has been issued will be given notice of cancellation or nonrenewal. Some insurers have been known to issue such endorse-ments, either listing a number of entities on the endorsement, or on an individual basis.

If producers begin to change these documents to appease their insureds, they are likely to be answerable for any situations where an insurer has to comply with the promises made. Granted, producers are under a lot of pressure. In fact, it is a common threat that the document be changed or some other producer will be found to do it.

Those producers who have changed these documents and have ended up as recipients of subpoenas have all expressed regret for having done so, since a lot of unproductive time is wasted during prolonged court proceedings; and adverse decisions against them are especially painful. In the final analysis, much will likely depend on the producers’ tolerance for risk—a tolerance that is greatly reduced following a legal action against them. *

The author
Donald S. Malecki, CPCU, has spent 48 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.

For a number of years, those to whom the ACORD Forms 27 and 28 were issued had the best of both worlds …. neither Form 27 nor 28 contained a disclaimer stating that they were being issued for informational purposes only.