Certificates of Insurance – Is What You See, What You Get?
 
June 1, 2007
 
James M. "Jim" Norman- Ft Lauderdale

You’re selling your hotel and the contract purchaser has delivered a certificate of insurance complying with the due diligence section of the purchase contract. Are you covered?

You’re a hotel operator who has received a certificate of insurance from the hotel owner that reflects the insurance coverage required under the management agreement, including your status as an additional insured and waivers of subrogation. Are you covered?

Almost all real estate contracts contemplate verification or evidence of the required insurance, most often in the form of an Acord™ certificate of insurance. People rely on certificates of insurance to tell them that insurance is in place. Is that reliance justified? Do certificates of insurance really mean what they seem to say?

There are a number of Acord forms commonly used to convey or evidence insurance coverage in commercial real estate transactions, including those relating to hotels and resorts. If you’re on the receiving end of a certificate of insurance, it’s critical that you know and understand its limitations. Failure to do so could bring you a very unpleasant surprise later. Watch for words like “endeavor,” “evidence” or “information.” See Chart A at end of article.

Do certificates of insurance, which are usually issued by agents or brokers, constitute enforceable evidence of insurance coverage that is binding on the insurance underwriter? Unfortunately, in most cases, the answer is “no.”

The Dangers of Relying on Certificates of Insurance

The disclaimers now included on most certificates of insurance render them worthless in terms of evidencing coverage. A recent New York case, Benjamin Shapiro Realty Co., LLC v. Kemper National Insurance Cos, 2003 WL 1226726 (1st Dep’t 2003), 2003 N.Y. Lexis 1753 (N.Y. July 2, 2003) illustrates the danger of relying on certificates of insurance. In this case the tenant’s insurance broker issued a certificate of insurance to the landlord naming the landlord as an additional insured under the tenant’s liability insurance policy. A claim occurred and the landlord learned that he was not an additional insured under the tenant’s policy, contrary to what the certificate of insurance indicated. The landlord sued the broker to recover damages for negligent misrepresentation, based on the certificate of insurance. The Court dismissed the action because the insurance certificate contained a disclaimer that it was “for information only” and did not amend or alter the actual policy of insurance.

The Devil is in the Details

If Acord Certificates of Insurance and current versions of the Acord Evidence of Property Insurance are not enforceable evidence of insurance coverage, then what is sufficient to verify, in a legally binding way, the existence of third-party insurance coverage? How do we require the insurance underwriter to provide prior notice of cancellation or non-renewal of the required insurance?

The answer sounds too simple: Insist on a copy of the complete policy and all endorsements. After you get it, read it (or have someone who understands insurance policies read it). The devil is in the details.

In cases where the policy and endorsements have not been issued prior to closing, and the lender, owner or operator requires binding evidence of insurance, it is recommended that property coverage be evidenced under Acord 28 (old version – 10/2003), Evidence of Property Insurance, or Acord Form 75, Insurance Binder. Other lines of insurance, including liability, should be evidenced under Acord Form 75, Insurance Binder. Make sure that the right entity is a named insured or additional insured, exactly as required by the contracts. Don’t forget to look for the waivers of subrogation that most purchase contracts and hotel management agreements appropriately require.

In the aftermath of terrorism, record hurricanes, tornadoes and a treacherous insurance marketplace, insurance program structuring has become complex and is ever changing. Some of the “standard” language of insurance requirements ignores issues of the affordability and availability of certain commercial insurance coverage. Risk management is now as much art as science and, as lawyers often note, a trap for the unwary. It’s best left to those who work at it on a daily basis. Unfortunately, many insurance professionals prefer issuing certificates of insurance to providing copies of policies or binders. While certificates of insurance may be appropriate for transactions involving smaller assets, there are times when you will need enforceable evidence of insurance, and may need to be persistent with insurance professionals. Here are things you often hear from insurance professionals, and responses you might consider:

Insurance Professional: A certificate of insurance is an acceptable substitute for an insurance binder.

Response: Then why do all those disclaimers appear on a certificate, but not on a binder? Haven’t you heard about the Shapiro v. Kemper National case?

Insurance Professional: Binders are only issued and appropriate at the beginning of a policy period.

Response: Actually, a binder can be issued any time during the policy period.

Insurance Professional: Sorry, but the insurer won’t allow use of the old Acord 28 because it doesn’t have their disclaimers.

Response: In that case, we’ll need a complete copy of the policy, including endorsements, or an Acord 75, insurance binder.

An Ounce of Prevention Is Worth a Pound of Cure

Dealing with evidence of insurance is not something to leave until the day of closing or contract signing. It’s best handled by dealing with it as part of your insurance underwriting specifications. It is best that you require your insurer(s) to agree up front, if requested, to issue certificates of insurance under Acord Form 28 (10/2003), or Acord Form 75, if required by a lender, operator or owner.

Grabbing insurance requirements provisions from form documents is a dangerous practice. Each transaction, in the context of its own specific and special circumstances, should have a review and analysis done by those with sufficient experience and expertise. Nothing is worse than the unpleasant surprise of “you’re not covered” when you have a claim. This is indeed another of those “an ounce of prevention is worth a pound of cure” areas. This article is only a brief overview of a small part of the complicated world of insurance and should not be relied upon as advice in a specific transaction or situation.

For more information, e-mail Jim Norman at jim.norman@hklaw.com or call toll free, 1-888-688-8500, or e-mail Christian Ryan, Vice President of Willis Insurance Group, at Christian.Ryan@willis.com or call 972-715-6202.

The authors thank Stephen Moss, Partner, Holland & Knight; Eric Schake, Executive Vice President, Willis Insurance Group; and David Liner, Senior Vice President, Willis Insurance Group, for their contributions to this article.

Chart A

Acord Form/Edition	Title/Provides	Disclaimers/Limitations
Acord Form 24 (01/1995)	Certificate of Property Insurance Minimal information on property insurance coverage	Yes – does not amend or alter policy coverage; insurer will endeavor (no obligation) to mail notice of cancellation (to certificate holder)
Acord Form 25 (08/2001)	Certificate of Liability Insurance Minimal information on liability and workers' compensation coverage	Yes – does not amend or alter policy coverage; insurer will endeavor to mail notice of cancellation (to certificate holder)
Acord Form 28 (Old Version 10/2003)	Evidence of Property Insurance Significant information on property insurance coverage	No disclaimers – confers policy rights to certificate holder; insurer must mail notice of cancellation (to certificate holder)
Acord Form 28 (New Version 07/2006)	Evidence of Property Insurance Significant information on property insurance coverage	Yes – does not amend or alter policy coverage; insurer will endeavor to mail notice of cancellation (to certificate holder)
Acord Form 75 (01/2007)	Insurance Binder Provides minimal information on insured’s property or liability coverage	No disclaimers – confers policy rights to certificate holder; insurer must mail notice of cancellation (to certificate holder)