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Certificates – What’s the policy?

Brokers delivering certificates of insurance need to be mindful of content that can create E&O exposures

According to Black’s Law Dictionary, a certificate of insurance is:

a document evidencing the fact that an insurance policy has been written and includes a statement of coverage of the policy in general terms. Certificates are snapshots of basic coverages and limits at the time of issuance of the certificate. Certificates cannot modify coverages or change the terms of the insurance contract.

Articles about certificates of insurance usually then proceed to explain how certificates are not insurance policies, they should not be relied upon as such and that some certificates are even described as not worth the paper they are printed on. This can be confusing for policyholders and other parties listed in certificates.

Take, for example, the proprietor of Bill’s Big Donuts who has just received a document, signed by his broker, confirming his contents and liability coverage under the Big Donuts Master Policy for his annual premium of $1,200. The document is identified as a certificate of insurance and he is the certificate holder. Should Bill not pay his premium because he has just learned that certificates are not policies? Of course not. Bill’s document is a policy and if you re-read the legal definition, nowhere does it indicate that a certificate cannot be a policy; it just can’t change the policy.

The one thing that can be said about the insurance industry is that we don’t lack for words, yet at some point we decided to take two separate documents that provide different legal rights to the recipient and name both certificates of insurance. For clarity let’s distinguish the two.

One type of certificate is a policy document, issued in the name of one party but delivered to another party identified as a certificate holder and who, upon paying premium shown on the certificate, becomes an insured to the policy. The certificate holder in this case has all the rights to coverage afforded by the policy, except the right to modify or cancel.

The other type of certificate is a document issued on behalf and in the name of one party but delivered to another party who is identified as a certificate holder and specified as an additional insured, but who doesn’t have to pay premium.

Therefore, if you are a certificate holder who pays premium then your certificate is your policy. But if you are a certificate holder who does not pay premium, your certificate is just evidence of insurance and you have no rights to the policy, except of course, if you are an additional insured, or perhaps a loss payee, or mortgagee. None of these parties pay a penny in premium, but all have certain policy rights.

Broker Role

Decades ago, brokers assumed the role of issuing certificates from insurance companies because they reasoned they could do it better and faster. All they had to do was issue certificates according to insurers’ specifications and everything would run smoothly. Advances in technology have now made it possible to complete and send certificates virtually in minutes. At the same time, the demand for certificates has exploded.

Certificates are now requested for every imaginable purpose, be it a single event, such as a golf tournament or a concert, continuing services such as winter snow plowing for property managers, and multi-million dollar projects involving the largest corporations in the country. Certificates are even posted to the Internet. I recently came across one for dog walking services, issued to a class of certificate holder identified only as “To whom it may concern.”

With this increased volume, so too has litigation increased alleging improperly issued certificates and in the United States the problem was becoming so acute that state legislators have stepped in. They directed that the ACORD form, literally peppered with mandatory disclaimers, had to be used with no modification or customization permitted. In Canada, we have no provincial regulations requiring the use of any particular form, but as a professional body, perhaps fearing the same exposure to litigation, brokers have incorporated similar disclaimers into the certificates issued here.

These disclaimers are not mandatory but are recommended, and presumably these satisfy insurers’ expectations that brokers will not exceed their authority when providing evidence of insurance. Faced with client demands that certificate holders receive the information they require, and coping with the limitations of the forms to meet this demand, brokers across Canada do customize or modify as necessary. The question is if by doing so; are they exposing themselves to professional liability?

E&O Exposures

Before considering this possibility, let’s step back and consider the alternative. In today’s world of numerous contracts for services, goods, tenancy, financing or other purposes, many contracts cannot be finalized until acceptable evidence of insurance is furnished. If the certificate is not acceptable, the only other alternative is to provide a copy of a policy, which for numerous reasons may not be available, leaving the broker with an extremely irate client. Therefore in the majority of circumstances, but particularly those with deadlines, a certificate is the only viable option.

A good example of this is a loan for real property, where the lender will not release funds unless satisfied with the insurance provided. In a typical case, the lender requires that they be added as Additional Insured to the liability policy, and that the property policies including boiler and machinery must contain an approved mortgage clause showing the loss payable to the lender as mortgagee. Cancellation for all policies is required to be 30 days prior notice and notice if the coverage materially changes. In this example, the lender will accept a certificate if deemed satisfactory .

The broker, to fulfill the request for the scope of insurance requested, will be required to do more than just issue the certificate. An endorsement to the liability policy is required to show the lender as an additional insured entitled to the notice of cancellation requested. The lender’s interest as mortgagee is to be added to the property policies.

The broker’s certificate contains the following disclaimers.

  1.  Certificate is issued as a matter of information only and confers no rights to the Certificate Holder;
  2.  Notwithstanding anything contained in the contract, the insurance is subject to the terms, conditions and exclusions of the policy; and does not amend, extend or alter coverage afforded by the policy;
  3. Should any of the policies described be cancelled, the insurer will endeavour to mail 30 days written notice to the Certificate Holder but failure to mail such notice shall impose no liability of any kind upon the insurer(s) affording coverage, their agents or representatives, or the issuer of the certificate.

When the lender receives the certificates, there is presumption their coverage request is met, otherwise the broker would not sign the certificate attesting to the fact that the additional insured and first mortgagee status are in the policy, or would they?

When a certificate holder, and in this specific example a lender, requests status requiring changes to the policy, what comes first; the certificate or the policy change? When the certificate conveys information that is not yet a fact, for example additional insured status and notice of cancellation is not yet endorsed to the policy, this is assumed to be a timing issue and not lack of intent on the part of the broker to make the changes, or with any expectation that the insurer will refuse to accept these.

What if a broker first issues the certificate and the insurer takes the position that the broker did not have authority to do so? Should a situation like this end up in litigation, the court may find that the certificate holder is entitled to rely on the representations made in the certificate. The broker, not the insurer, could end up “on the hook” for any coverages determined by the court to have been in effect for that additional insured. Even if evidentially exonerated, the broker will incur significant legal fees.

If above all else the certificate must be accurate to avoid an E&O exposure, so too should disclaimers be applicable to the certificate issued. While disclaimers 1 and 2 above do apply as it is the policy that governs, disclaimer 3 contradicts it completely. In our example, the lender’s right to notice of cancellation under the property policies is protected by provincial statutes and is even entrenched by the Supreme Court of Canada (see sidebar), which affirmed that policies cannot be cancelled with prejudice to the mortgagee’s rights .

There is no “endeavour to provide notice” wording in the property policy. If notice of cancellation is required for other policies, these must be endorsed. Often brokers that are asked to modify disclaimer 3 so that it reflects policy notice decline to do so because this is pre-printed to the form and they cannot change, it although it is incorrect. Clearly common sense should prevail. Interestingly, state legislators also disliked this wording of this disclaimer and in December 2009, the ACORD certificate mandatory cancellation notice wording was changed to read:

Should any of the Described Policies be cancelled before expiration thereof, notice will be provided in accordance with policy conditions.

The debate has shifted to whether the disclaimer should include the number of days notice the policy will provide. It may be years before state legislators make a decision. However, on our side of the border, I recently noticed that a national broker most vocal in requiring its brokers to never modify or customize the cancellation disclaimer appears to have adopted this new wording. Let’s hope that all Canadian insurance companies and brokers agree that this change makes sense, but perhaps they could also include the period of notice to remove all doubt.

Susan Saksida is a risk management and insurance consultant with Cameron & Associates. She can be reached ts susan@cameronassociates.com or 416-350-2774.

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Canadian Case Law

Certificates confer strong rights to lending institutions

In London and Midland Gen. Ins. v. Bonser, 1972 CanLII 18 (SCC), [1973] SCR 10, the Supreme Court of Canada upheld the provisions of s. 110(1) of The Insurance Act in Ontario, which places the insurer under a duty not to cancel or alter the policy without due notice being given to the mortgagee.  (See http://canlii.ca/t/1twv1.)

And in Royal Bank of Canada v. State Farm Fire and Casualty Co., 2005 SCC 34 (CanLII), [2005] 1 SCR 779, the lender’s rights were affirmed again when the court held that the insurer could not rely on a material change in risk to void the mortgagee’s coverage in the mortgage clause, noting that the clause “clearly states that the mortgagees’ coverage shall remain in force ‘notwithstanding . . . any vacancy or non‑occupancy’ attributable to the mortgagor.” (See http://canlii.ca/t/1kxrg.)

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Copyright 2012 Rogers Publishing Ltd. This article first appeared in the April 2012 edition of Canadian Insurance Top Broker magazine.

Transcontinental Media G.P.