Like
a magician pulling a rabbit out of a
hat, parties to a real estate transaction
often pull out a certificate of insurance
as evidence that the party has provided
the insurance required by the transaction
documents. Most real estate transactions,
be they a loan, lease, construction contract
or reciprocal easement contain insurance
requirements. The lawyer is often faced
with reviewing the certificate to determine
whether it satisfies the client's needs
or is merely an illusion of reality.
The lawyer is likely to receive one of
two forms:
· an
ACORD 25-S (Certificate
of Insurance); or
· an ACORD 27 (Evidence of Property Insurance).
ACORD Forms
These
forms are published by ACORD (www.acord.com),
a not-for-profit insurance association
affiliated with over 850 property
and casualty insurance companies,
35,000 independent agencies and
subscribers, and the major insurance
agent professional organizations.
Among other services, ACORD publishes
standard forms approved by a large
number of insurance companies. ACORD
states that these forms, or substantial
equivalents, account for more than
90% of the certificates issued,
although other organizations, notably
the American Institute of Architects,
have developed their own insurance
certificate forms. In this article,
each of the ACORD forms is called
a "certificate," although
ACORD uses this term only for the
ACORD 25-S. Insurance certificates
are generally issued by agents and
brokers rather than by the insurance
company itself. ACORD 25-S The ACORD
25-S is titled "Certificate of Insurance." It
purports to evidence existing insurance
policies that are identified by
number, effective date and expiration
date.
The
form contains a place to describe
the policy limits as well as the
following three statements:
This
certificate is issued as a
matter of information only
and confers no rights upon
the certificate holder. This
certificate does not amend,
extend or alter the coverage
afforded by the policies below.
This is to certify that policies
of insurance listed below have
been issued to the insured
named above for the policy
period indicated.
Notwithstanding
any requirement, term or condition
of any contract or other document
with respect to which this certificate
may be issued or may pertain, the
insurance afforded by the policies
described herein is subject to all
terms, exclusions and conditions
of such policies.
Should any of the above described policies be cancelled before
the expiration date thereof, the issuing company will endeavor
to mail ____ days written notice to the certificate holder
named to the left, but failure to mail such notice shall
impose no obligation or liability of any kind upon the company,
its agents or representatives.
The ACORD 25-S appears to go out of its way to advise that
the recipient of the certificate has no right to
rely on the certificate and to make the recipient
wonder why he or she accepted the certificate in
the first place. ACORD 27 Unlike the ACORD 25-S,
the ACORD 27 is styled "Evidence of Insurance." Like
the ACORD 25-S, it purports to evidence existing
insurance policies. It appears to be adaptable
to any type of physical damage insurance and contains
the following statements:
This is evidence that insurance as identified below has been
issued, is in force, and conveys all the rights and privileges
afforded under the policy.
The policy is subject to the premiums, forms, and rules in
effect for each policy period. Should the policy be terminated,
the company will give the additional interest identified
below ___ days written notice, and will send notification
of any changes to the policy that would affect that interest,
in accordance with the policy provisions or as required by
law.
The
ACORD 27 also provides space to
identify whether a person with an
additional interest is a lender,
loss payee or additional insured.
Space is reserved to identify persons
with other interests in the policy.
Differences with Distinctions?
Note the differences in the ACORD 27 statements and those
in the ACORD 25-S. The ACORD 27 conveys all the rights and
privileges afforded under the policy; lacks a statement that
it does not amend, extend or alter the coverage afforded
by the underlying policy; and contains an unconditional obligation
to give the certificate holder advance notice of termination
and to advise the certificate holder (without specifying
how far in advance) of any change to the policy that would
affect the interest of the certificate holder. Nevertheless,
the
ACORD 27 and the ACORD 25-S share the notion that the form
is subject to the terms of the underlying policies.
According to the ACORD Forms Instruction Guide (1994 ed.),
the ACORD 25-S (Certificate of Insurance) was designed to
evidence the existence of insurance and to be delivered to
a third party not having an interest in the policy. The Guide
states that the ACORD 25-S form should not be used to satisfy
a mortgagee or lienholder, waive rights, quote any wording
amending a policy unless the policy itself has been amended,
quote wording from a contract, or attach to an endorsement.
By contrast, the ACORD 27 (Evidence of Property Insurance)
was designed to be delivered to a party (such as a lender,
loss payee or additional insured) having an interest in the
policy. The format of the ACORD 25-S suggests that the ACORD
25-S is to be used only with liability policies. Likewise,
the title of ACORD 27 (Evidence of Property Insurance) suggests
that it is to be used only as evidence of property insurance.
Many agents believe this to be the case; they often resist
using the ACORD 27 to evidence liability insurance. The ACORD
instruction guide, however, does not make the property/liability
insurance distinction.
In practice, the ACORD 25-S is used for both liability
and property insurance. Notwithstanding ACORD’s contrary
instructions, it is issued both to those having and not having
an interest in the policy. When it is used for property insurance,
property coverage is dealt with by inclusion of property
insurance terms in the "other" space beneath the
various specified types of liability insurance. In these
cases, the preparer endeavors to include a specification
of policy amounts, deductibles and special conditions in
the "limits" column.
When both liability and property coverage are listed
on an ACORD 25-S, the "certificate holder" box (in which
the interest of the certificate holder is identified) may
become garbled. For example, a lender typically requires
that it be an "additional insured" on liability
policies and a "mortgagee" for property insurance.
Attempts to explain all this in the limited space afforded
by the "certificate holder" box may result in confusion.
When questioned, the issuing agent often indicates a preference
for the ACORD 25-S to evidence property insurance because
it is the only certificate form with which the agent is familiar.
When the agent is pressed to check with its insurer, however,
an ACORD 27 becomes available.
Certificates and Case Law
What rights does a certificate of insurance grant
to the certificate holder? The Fifth Circuit Court
of Appeals held that the insurer had no duty to give
to the certificate holder, who was the insured’s landlord, notice of cancellation
of a liability insurance policy, notwithstanding that it
had agreed in the certificate to give a 10 day notice of
cancellation. United States Pipe & Foundry Co. v. United
States Fidelity & Guar. Co., 505 F.2d 88 (5th Cir. 1974).
The United States Pipe court held that because the certificate
holder had no interest in the policy, no consideration existed
for the insurer’s promises contained in the certificate.
The lease apparently did not require that United States Pipe
have an interest in or otherwise benefit from the insurance
in question. United States Pipe stands for the proposition
that a certificate of insurance itself confers no rights
on the named holder of the certificate.
In Lezak & Levy Wholesale Meats, Inc. v. Illinois Employees
Ins. Co., 460 N.E.2d 475 (Ill. Ct. App. 1984), the plaintiff
was an "additional insured" on a policy that insured
against "all risk" of physical damage to a cold
storage facility and to the personal property stored there.
The plaintiff received a certificate of insurance (apparently
on the ACORD 25-S form or its equivalent). A breakdown of
the cooling machinery spoiled a significant amount of the
plaintiff’s meat. The policy contained an exclusion
from coverage for loss due to equipment
breakdown. Although the certificate listed several exclusions
from coverage, this one was not listed. Based on the limiting
language in the certificate of insurance and on the plaintiff’s
testimony that he understood that the certificate was not
the policy, the court held that the policy exclusion applied.
More
recently in Pekin Ins. Co. v. American
Country Ins. Co., 572 N.E.2d 1112
(Ill. Ct. App. 1991), a subcontractor
delivered to the general contractor
(an additional insured) a certificate
of insurance containing the ACORD
25-S language, which identified
the insurance issued as including "commercial
general liability." However,
the policy contained an exclusion
for claims arising out of "your
work," described on a schedule
to the policy as "roofing construction." An
employee of the subcontractor was
injured on the job and sued the
general contractor, who tendered
defense of the claim to the subcontractor’s
insurer. The insurer denied coverage.
The general contractor had not reviewed
the policy but argued that because
the policy exclusions conflicted
with the plain meaning of the certificate,
and because the general contractor
was not made aware of the discrepancy,
the certificate should prevail.
The court held that the general
contractor knew it had to look to
the policy to ascertain its terms
because the certificate disclosed
on its face that it was not part
of the policy. Id. at 1114. These
cases illustrate two general rules:
an insured and any other certificate
holder has a duty to examine the
policy within a reasonable time
after receipt of the certificate
and to contact the insurer regarding
any discrepancies; and a certificate
holder is generally charged with
knowledge of the terms of the main
policy. John A. Appleman, Insurance
Law and Practice, § 9143 (1981).
By contrast, some cases hold that an insured may, through
the certificate of insurance, obtain rights greater than
those granted by the terms of the policy. Unlike United States
Pipe, these are cases in which the certificate holder clearly
had some interest in the policy. These are generally cases
in which an inconsistency between the certificate of insurance
and the underlying policy may have misled the certificate
holder about its rights under the policy.
Thus, when a mortgage received a certificate of insurance
indicating general coverage for damage caused by the insured’s
family, but the policy actually restricted the coverage to
specific members of the insured’s family the mortgage
recovered for injuries caused by an uninsured family member.
White Motors Corp. v. Northland Ins. Co., 315 F. Supp. 689,
693 (D.S.D. 1970).
In another case, the indemnity provision of the certificate
of insurance provided by a subcontractor to its general contractor
stated that the subcontractor would indemnify the contractor
against all claims for injury or damage. The policy, which
was not tendered to the general contractor, contained an
exclusion for rented motor vehicles. The indemnity clause
in the certificate controlled, and the insurer provided coverage
for an accident involving a rented motor vehicle. J.M. Corbett
co. v. Insurance Co. of N. Am., 357 N.E.2d 125 (Ill. Ct.
App. 1976).
These cases reflect the principle that when the certificate
is considered to be part of the underlying policy, any inconsistency
between the two creates an ambiguity in the policy that courts
will construe in favor of the insured. International Amphitheatre
v. Vanguard Underwriters Ins. Co., 532 N.E. 2d 493 (Ill.
Ct. App. 1988).
The Illinois appellate court, when deciding the International
Amphitheatre case, was faced with the task of distinguishing
its own opinion in the Lezak "the certificate specifically
stated that it was not part of the policy; the court found
no ambiguity between the certificate and the policy; and
the insured admitted knowledge that separate exclusions were
contained in the policy." Id. at 502
The same court, when deciding Pekin Insurance Company,
distinguished it from International Amphitheatre
and J.M. Corbett Co. by reasoning that in Pekin there
was a "clear showing… that
the certificate was not part of the policy, and it conveyed
no rights to the certificate holder." Pekin, 572 N.E.2d
at 1114.
After reading these cases, a cynic might conclude that the
courts reach the results they think are right and conveniently
have two competing lines of cases to assist them in reaching
a preconceived result. More likely, the courts recognize
that reviewing the original policy is often not practical
in the real business world, making reliance on insurance
certificates as evidence of insurance necessary. Then the
court views the certificate as part of the underlying policy.
Any conflict between the certificate and the policy (whether
the conflict results from internally inconsistent statements
or from the absence of policy provisions in the certificate)
will be deemed to create ambiguities in the policy construed
for the benefit of the insured and to the detriment of the
insurer. When the certificate contains clear language separating
it from the underlying policy, the certificate holder will
be bound by the underlying policy.
Are Certificates Worth Anything?
Given these conclusions, a practitioner might ask
if he or she may ever rely on a certificate of insurance
to show that another party has complied with the
insurance requirements of the transaction even if,
as a practical matter, the underlying policy is unavailable.
The prudent answer is "no" when
the certificate contains the ACORD 25-S language. ACORD 27,
or its equivalent, which conveys the rights afforded under
the policy (making it easier to argue that the certificate
is part of the policy) is preferred whenever the certificate
holder is to have an interest in the underlying policy as
additional insured, mortgagee, loss payee or otherwise. In
addition, a certificate recipient should consider the following
steps:
1.
Clearly establish in the underlying
transaction documents (e.g.,
the lease or loan documents)
the extent to which the recipient
is to have an interest in insurance
policy(s) obtained by the other
party.
2. Be sure that the recipient’s
interest in the policy is specifically
set forth in the certificate
of insurance.
3. If relying on a certificate in lieu of a copy of
the policy, use an ACORD 27 rather than an ACORD 25-S,
regardless of whether the insurance covers liability
or property.
4. If the ACORD 25-S must be used, require the issuing
agent to delete (and initial such deletions) any "will
endeavor" language and the provisions restricting
liability, narrowing the scope of coverage and limiting
the obligation to provide notice of cancellation.
5. Have the issuing agent attach to the certificate
copies of policy provisions of most concern. For example,
the "standard" mortgagee clause varies from
company to company, including on matters about which
the mortgagee will be given notice, the notice period
and non-imputation of the acts of the primary insured.
6. Have the issuing agent either certify that it has
authority to make a requested modification to the certificate,
obtain a letter from the insurance company ratifying
the act of its agent, or obtain a copy of the agent’s
agreement with its insurance company (because insurance
companies differ in the amount of discretion granted
to the agent/broker to modify the form).
7. Whenever possible, have the recipient’s insurance
advisor review the certificate of insurance and any
other available information about the other party’s
compliance with the insurance requirements of the transaction.
8. Provide to the agent a tailored form of certificate
that states clearly that it is part of the policy, confers
an interest in the policy and incorporates suggestions
2, 5 and 6 above.
9. Consider whether, in light of the distinction between
ACORD forms 25-S27, transaction documents that require
a "certificate" of insurance should be modified
to provide instead for "evidence" of insurance.
10. Check state law to determine whether any applicable
provisions require specific terms for certificates.
See, e.g., California Insurance Code § 384.
Conclusion
Certificates
of insurance are not always what
they seem. Depending on the form
used, often the certificate conveys
no rights to the certificate holder
and leaves the holder subject to
exclusions and other policy conditions.
A practitioner who must accept a
certificate of insurance should
consider requiring the ACORD 27
with the alterations suggested above.
To ensure that the certificate reflects
reality and not illusion, however,
review of the policy itself is the
best practice.
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________________
Alfred S. Joseph III is a partner
with Stites & Harbison
in Louisville, Kentucky.
Arthur E. Pape is a partner with Katten, Muchin & Zavis
in Chicago, Illinois.
Reprinted with permission from Probate & Property, January/February
1995
(American Bar Association). Copyright © 1995 American
Bar Association.
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