Joseph L. Cohen, W. Mason and Sean Milani-nia | Fox Rothschild
Consider the following scenario: the construction project is ready to proceed. The deal is done. The agreements have all been carefully crafted, with detailed provisions on insurance dedicated to reducing risk. Those provisions require the downstream trade contractors to furnish certificates of insurance listing the owner and prime contractor as additional insureds on the downstream contractor’s policies of insurance. A provision in the prime contract further requires the prime contractor to provide the owner with a certificate of insurance showing the owner as an additional insured on the prime contractor’s policies. At the ceremonial ground-breaking and right before work commences, the downstream contractors deliver their insurance certificates to the prime contractor and the prime contractor delivers its certificate plus the downstream certificates to the owner. From there, each insurance certificate will begin its final destination to the project file (either electronic or physical) where, with any luck, it will serve the regular stint before being discarded after the project’s successful conclusion. Otherwise, it will be retrieved under much stress and heavy scrutiny. The acceptance of insurance certificates is often viewed as standard industry practice, but should it be?
The answer is a resounding “no.” There are many form development and construction agreements in circulation that deem insurance certificates to be acceptable evidence of insurance. But, a certificate of insurance should not be relied upon because it does not mean that insurance has been placed. You deserve real evidence that the requisite additional insured coverage is in place (in the form of a policy endorsement), and here is why.
First, a certificate of insurance is not evidence that the insurance has actually been placed with the carrier or provider. There are insurance brokers, insurance agents, and insurance carriers or providers. An insurance broker solicits insurance business from the public under no employment from any particular carrier but, having secured an order, places the insurance with the company selected by the insured. An insurance agent, on the other hand, has a fixed and permanent relationship to an insurance carrier that the agent represents and has certain duties and allegiances to that company. Often used interchangeably and referencing them collectively as “insurance intermediaries,” these intermediaries often generate insurance certificates from templates maintained in their own offices. But, an insurance intermediary, particularly insurance brokers who act as agents for the insureds, may lack the authority from the carrier to actually bind coverage. Thus, whether the coverage described in the certificate exists could be a product of whether the subcontractor’s intermediary is an insurance agent with authority to bind coverage. No doubt, making that determination would require a fact intensive investigation into the intermediary’s agreement with the carrier. That isn’t easy.
If the intermediary lacks the authority to bind coverage and fails to place the additional insured coverage with the carrier, the situation could arise where a certificate showing additional insured coverage exists even though there is no coverage in place. In that event, the putative additional insured may have no choice but to pursue the intermediary or carrier for redress under an estoppel theory. That carries with it all the expenses and risks inherent in litigation, which the agreement’s provisions for insurance should have been designed to avoid. See Pinski v. Adelman, 955 F. Supp. 73 (N.D. Ill. 2010) (noting that imputation of liability to an insurer for the conduct of an insurance intermediary has had a somewhat inconsistent history in Illinois). The better practice is to confirm the coverage is in place by demanding more robust evidence of additional insured coverage in the first instance.
Second, appearing conspicuously in all caps and bold font at the top of many certificates, but often overlooked, the certificate itself contains a disclaimer that it is not evidence of insurance. The typical disclaimer provides:
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.
With a disclaimer like that, a court could conceivably conclude that a putative insured had no right to rely on the certificate, which could have drastic legal implications in a coverage dispute.
Third, if the additional insured coverage has not been placed, then whether coverage exists for the putative additional insured may depend upon whether the downstream contractor has a blanket additional insured endorsement on its policy. A blanket additional insured endorsement is an endorsement that automatically grants insurance to:
ANY PERSONS OR ORGANIZATIONS WHEN YOU HAVE AGREED IN WRITING IN A CONTRACT OR AGREEMENT THAT SUCH PERSONS OR ORGANIZATIONS BE ADDED AS AN ADDITIONAL INSURED.
In the event of a claim and ensuing coverage dispute, a court may scrutinize the contract’s language to determine whether the agreement requires additional insured coverage under the downstream contractor’s policy. Two observations ring true here. First, the owner may not control, know, or have scrutinized the agreement between the prime contractor and those downstream. Maybe the obligation to furnish additional insured coverage is adequately memorialized, maybe it is not. Second, unless the downstream contractor had furnished its policy, the owner and prime contractor would not be in a position to know whether the downstream contractor has a blanket additional insured endorsement. Why leave either to chance?
Given the fallibility inherent in certificates of insurance, their widespread acceptance and use as evidence of insurance in the industry should come to an abrupt halt. Why not demand more robust (or actual) evidence of insurance by simply requiring a policy endorsement (or such other evidence of insurance as the upstream contractor and/or owner requests) showing that the additional insured coverage is in place. You deserve better than a certificate of insurance.