Risk Management

Certificates: a new wave of problems

Producers need to be aware of laws, regulations and regulatory
directives that govern certificates

By Donald S. Malecki, CPCU

Many producers have learned either directly or through the mistakes of others that certificates of insurance cannot be treated lightly. When, for example, certificate holders request to be additional insureds, a growing number of producers are issuing certificates with accompanying additional insured endorsements.

The days of issuing certificates showing the certificate holders as additional insureds when, in fact, policies have not been endorsed to reflect that status, are over. Undoubtedly, the reason for the reduction in these kinds of problems has been an overwhelming number of court cases where, to put it bluntly, producers have been sued.

What may help to also reduce problems with certificates are the laws, regulations and regulatory directives that have been enacted by most states governing certificates, binders and other documents. While these laws, regulations and regulatory directives differ by state, their general theme is that making modifications to certificates that are not reflected in the policies shown can amount to misrepresentations. The result can expose producers to civil and/or criminal actions.

The next wave of problems

While these laws, regulations and regulatory directives will undoubtedly help to curb the number of disputes over certificates that result in litigation, they are not a total panacea. One reason may be that some producers may not be aware that these laws exist, judging from how some certificates are still being prepared.

Another reason is that these laws do not address every problem area that can arise. In other words, these laws are general in nature stating in essence that “thou shall not misrepresent information having to do with certificates or thou shall be answerable for any problems.” The question is whether producers are actually cognizant of what may or may not be a misrepresentation with regard to the completion of certificates and what its impact may be on them.

For example, almost every time the standard ACORD 25 Certificate of Liability Insurance is issued, the coverages reflected in the policies shown can be argued to have been misrepresented if the policies have exclusionary endorsements attached which are not shown on the certificates.

One needs only to look at the section of the Certificate of Liability Insurance ACORD 25 just above where the certificate holder’s name appears. This reads: “Description of Operations/Locations/ Vehicles/Exclusions Added By Endorsement/Special Provisions.”

This section that calls for the declaration of “exclusions added by endorsement” is nothing new. It has appeared in the ACORD certificate for some time now. What is new is that it is developing into a “fertile” area for litigation because both certificate holders and the persons or organizations requesting that certificates be issued are arguing that the producers issuing the certificates are responsible when there is a problem with coverage.

Cases involving misrepresentations of coverage for failing to show applicable exclusionary endorsements are now emerging though addressing multiple issues. One such case is E.On U.S. Services Inc. v. QSC Painting, Inc., No. 08-54-JBC (U.S. Dist. Ct. E. Dist. KY 2009). The issue focused on by the court here was not whether the insurance agency was negligent in misrepresenting coverage through the issuance of a certificate, but whether the court had personal jurisdiction over an out-of-state insurance agency that issued the allegedly troublesome certificate.

In 2006, QSC Painting, Inc. (hereinafter, contractor), which specialized in painting electrical transfomers and related equipment, was scheduled to paint at the Lexington, Kentucky plant of Kentucky Utilities Company (KU), a subsidiary of E.On U.S. Services, Inc.

Prior to commencing work, the contractor requested its agent, a Pennsylvania corporation, to add KU as an additional insured to its existing insurance policy issued by Century Surety Company (insurer) and to furnish E.On U.S. Services, Inc., with a certificate of insurance.

The contractor obtained the additional insurance to comply with its contractual obligations to KU and to E.On U.S. Services, Inc. After assisting its insured (the contractor) in procuring the requested coverage, the agency sent, via facsimile, a copy of the certificate of insurance to E.On’s office in Kentucky. The certificate included the policy limits but omitted an endorsement that excluded coverage for claims made by employees of the contractor. After E.On received the certificate, the contractor commenced with the painting at KU’s plant.

On the last day of the project, an employee of the contractor was electrocuted while working. His estate subsequently filed a workers compensation claim against the contractor and sued E.On and KU for negligence. Both E.On and KU filed this action against the contractor in an attempt to require it to indemnify, defend, and hold harmless both of them with regard to the action by the contractor’s employee and a related investigation by the Kentucky Public Service Commission.

Coverage sought by KU, as an additional insured on the contractor’s liability policy, was denied because the contractor’s policy contained an endorsement that excluded coverage for claims made by employees of the contractor.

In response to that suit, the contractor commenced a third-party action against its insurance agent and the insurer alleging, among other things, that its insurance agent negligently misrepresented the insurance policy’s scope of coverage that the contractor purchased from the insurer. The insurer was ultimately dismissed from the suit.

It is not necessary to discuss the legalities of this case in reference to how the Kentucky court came to the conclusion that it has specific personal jurisdiction over the Pennsylvania insurance agency. How this issue will be resolved is uncertain.

What is important to note is that with the contractor confronted with a potential breach of contract for not fulfilling its contract with the two Kentucky entities, it is not surprising to find the contractor also suing its insurance agent for negligence and negligent misrepresentation for its omission having to do with the exclusionary endorsement.

In fact, this could be the only meaningful approach for the third-party certificate holders to recover their damages, since they may be precluded from filing suit directly against the insurance agent who issued the allegedly erroneous certificate. Unless the certificate holder can prove that it is an intended (possibly incidental) third-party beneficiary under the contract between the entity required to obtain a certificate and the insurance agent or broker relied on to procure the certificate, the certificate holder does not normally have a direct right of action against the named insured’s insurance agent.

If the third-party beneficiary approach does not work, the other important option to obtain results would be to file a suit against the party who had the obligation to have the certificate of insurance issued and for that party to then file suit directly against its own insurance agent. This appeared to be the case here.

Conclusion

Producers are confronted with a dilemma that may be difficult to resolve. On the one hand, certificate holders are becoming increasingly more knowledgeable and demanding about whether another’s insurance portfolio provides the proper coverage. Certificate holders are beginning to realize that insurance policies have many exclusions, some of which apply by endorsements. Therefore, they not only want to know what exclusions are applicable but also have a right to know that kind of information.

At the other end of the spectrum are the producers, themselves, and they question how certificate holders can be appeased with their concerns and requests and how producers can accommodate them without incurring a great deal of time and expense that will likely go uncompensated.

Currently at least, there is no computer capability available through agency vendors that can automatically complete a certificate separately for each policy that can list the exclusions applicable to policies by endorsement. What would be required currently would be very time-consuming, since the customer service representative or whoever is assigned the job to complete certificates would have to review each policy, identify the exclusion and then manually place the appropriate exclusionary endorsement by name on the certificate.

A more salient solution might be to simply remove the reference having to do with exclusionary endorsements from the insurance certificates and accommodate those certificate holders who demand more specific information than the certificate issued normally gives.

There is nothing particularly wrong with taking this approach, given that certificate holders have not been requesting proof of exclusionary endorsements and it has only been recently that certificate holders have been filing suit because of this misrepresen­tation. Certificate holders can still request more precise information on certificates simply by asking for it.

What is important in the meantime is that some action be taken because every time a certificate is issued without identifying the exclusionary endorsements applicable to the policies listed on the certificate, it brings with it the potential that the producer is responsible for a misrepresentation (negligent or intentional). As soon as the news spreads about this weak link having to do with certificates, rest assured that more cases will develop. This is not what producers want to hear, but unless steps are taken to do something about it, more cases alleging producers’ fault will occur.