When a construction firm wins a job or a retail store leases space in a mall, the person or company on the other end of the transaction typically imposes certain requirements. Chief among these is that the contractor, borrower, or tenant provides evidence that they has appropriate insurance. One way to do that is to deliver copies of the insurance policies. However, a bank that has thousands of outstanding loans might not want copies of its borrowers’ policies, for space reasons alone. A customary substitute for policies is a certificate of insurance. These documents are easy to complete and store. However, many insurance buyers and the firms with which they do business do not understand them.
An organization called the Association for Cooperative Operations Research and Development (ACORD) created the most commonly used certificate forms. ACORD’s instructions state that certificates are for informational purposes only. Many businesses that receive certificates incorrectly believe that they are contracts between them, the policyholder, the named insurer, and the writing agent. In fact, the certificate is nothing more than a snapshot of the insurance coverages in place at the moment the agent issued it. While it represents the policies in force, it does not provide the insurance coverage. Only the policies, which are contracts between the insurance companies and the policyholder, can do that.
For example, standard ACORD certificates state that the insurance companies will endeavor to provide advance notice to the certificate holder if they cancel the listed policies. Many certificate holders rely on this wording, but it does not legally bind the companies. Only specific provisions in the policies can obligate the companies to provide advance notice.
Businesses often require that certificates contain certain words, phrases or terms. It is important to know that insurance agents have legal boundaries that they must observe when they consider these requests. An agent may legally insert wording into a certificate only if the policies it lists contain that wording. For example, a general contractor might want a certificate it receives from a subcontractor to show that the sub’s general liability insurance policy covers the GC as an additional insured. The ACORD Certificate of Liability Insurance has check boxes that an agent can use to designate the certificate holder as an additional insured. If the policy contains an endorsement that provides this coverage, the agent can check the box without violating his contracts or state insurance law.
However, most states forbid agents from issuing certificates that imply coverage the policies do not provide. For example, some certificate holders might want certificates to state that the policyholder’s coverage applies on a “primary and noncontributory” basis. If the actual policies do not contain this language, the agent cannot properly add it to the certificates. Only endorsements issued by insurers can change insurance policies; certificates cannot. An agent who issues a certificate implying a false change in coverage might be breaking state insurance law and probably violating his contract with the insurer.
Before a business owner signs a contract for a construction job or a lease, it is important that she check with her insurance agent to make sure she has the coverage the contract requires. The agent can advise her about the availability and cost of any missing coverages. Only after the coverages are in place may the agent issue a certificate reflecting them.
When used appropriately, certificates of insurance are convenient business tools, but they can cause major problems otherwise. Remember, certificates are evidence of insurance coverage — not the source of it.