The Limitations of Certificates of Insurance
Many policyholders rely on certificates of insurance to prove that insurance coverage exists. But in reality, the certificate of insurance has limited functionality as evidence of insurance coverage. While it may alleviate the potential for additional audit premiums, it is misused and over-valued and can easily leave the recipient with a false sense of security.
Additionally, states such as New York and Texas have enacted or have impending legislation dealing with issues related to certificates of insurance, and these changes will impact how they are issued and what they will represent. Nevertheless, the common theme is that a certificate of insurance is for informational purposes only and that it is essentially a snapshot of the insurance coverage that is in effect for the named insured as of the date of issuance of the certificate.
There are, however, certain issues and limitations with certificates that need to be considered:
Possibly compromised limits. The limits of liability shown on the certificate of insurance are the exact amounts as shown in the insurance policy when it was issued. What you will not see is any reduction resulting from a claim and what the reduced limits are. A certificate is never adjusted to reflect any reductions in limits as a result of any claims.
Does not reflect subsequent changes. The certificate contains information as of the date of its issuance. The very next day, changes could be made by either the first named insured or the insurance company and there is generally no legal obligation on the part of the insurance carrier or its legal representative to provide any notice of changes or cancellations. Some of the changes can be quite significant including: cancellation due to non-payment, at the insured’s request, for underwriting reasons or the exhaustion of the policy limits; reduction or removal of certain coverage or limits from within the policy; or the removal of additional insured status, waiver of subrogation, or primary and non-contributory.
Policy terms, conditions limitations or requirements. Every insurance policy will contain terms, conditions, limitations or requirements that can cause major coverage defects if not known or properly handled. As a certificate holder you may not know if your required endorsements were properly added or what the requirements are for you to have status as an additional insured. It is imperative to have some understanding of these from another source as they will most likely not appear on a certificate.
Other states coverage. Workers compensation insurance is state-specific and the certificate may not list all the states for which coverage is required and afforded. This can become an issue in dealing with claims, audits and liability exposures.
Coverage confusion. Agents and brokers may indicate that certain coverage or provisions are provided when, in fact, they are not. This can result in a denial of a claim by the insurer. A claim dispute can consume time and money and whether or not you will prevail is subject to many factors, such as jurisdiction, applicable state laws and court interpretations.
Rather than relying solely on certificates of insurance to gain better control and understanding of your insurance coverage, consider taking the following steps:
Set realistic insurance requirements. Insurance policies are not designed to meet the specific contractual requirements of various third parties, nor will they cover every contingency possible. In the quest to meet complex insurance requirements, unrealistic requirements can easily lead to certificates being issued that may be misrepresentations of coverage or, even worse, fraudulent.
Using a one-size-fits-all approach will place an unnecessary burden on some and increase the potential of an uncovered exposure on others. It is advisable to set primary requirements applicable to all and then tailor any additional requirements to the specific exposures.
Get actual policy forms. In addition to the certificate, require that a copy of actual policy forms be provided to you. If you cannot get a full policy, make sure that you obtain a copy of the declarations page, the forms and endorsements pages, specific pages showing all liability limits and any endorsements to the policy. Review these documents for compliance with your requirements and identify defects or deficiencies. Large companies sometimes use third parties to track certificates, but this is generally a cursory compliance and date review and not an examination of the details.
Contractual alignment. Contractual requirements for insurance and indemnification need to be properly drafted and coordinated so that they operate from a “belt and suspenders” approach where what one doesn’t do the other will. It is important to remember that these are two different contracts, and as such, there is potential for court interpretation. The result may be contracts that are not properly aligned, resulting in unintentional coverage limitations or a complete elimination of coverage.