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Certificates of Insurance

September 2003

Insurance certificates are one of the more dangerous documents that float between insureds, insurers, and a myriad of third parties. There are many landmines to watch out for.

by Peter M. Polstein

I recognize that the subject relating to the issuance of certificates of insurance has been addressed recently in IRMI Update, and I'm not attempting to prolong this subject ad nauseam. However, to me the issuance of certificates is one of the more dangerous documents that float between insureds, insurers, and a myriad of third parties.

Why Ask for a Certificate of Insurance?

Throughout my career, I have seen hundreds if not thousands of certificates issued to folks when there was no legitimate need, or when language contained in the certificate was not only inappropriate, but left the issuer with the potential for a significant errors and omissions situation. All too often, when a request is made for a certificate, the issuer does not start with the simple single word: Why? Why is the certificate required? Why include _____ as an additional insured? Why add _____ as a vendor?

These questions need to be thoroughly investigated and answered. And the answer cannot be any of the following: "Because I was asked to have it issued" or "My attorney said to" or "Their attorney requested it" or "The contract requires it." Generally, requiring a certificate of insurance is a result of negotiation between parties, which in most cases turns out to be a contractual obligation.

That being said, however, how many times are certificates issued where the insurance requirements are the only clause of the contract actually read by the broker/agent? In my view, it is incumbent for the broker/agent to read the entire contract, irrespective of length, to ascertain where the true risk lies, and whether the certificate will comport to the verbiage within the contract (which is a rare occurrence, at best).

Many times certificates are issued when there is no legitimate reason for their issuance. In a great many instances, insureds have no idea of the potential liability created by asking for these documents, especially, when third parties are added as additional insureds. It is important that insureds realize the potential detrimental effect on their limits created by the addition of multiple third parties as additional insureds.

What Does the Contract Say?

As mentioned above, it is very important to read and analyze the language of the contract. For example, consider the situation where someone has written into the verbiage a hold harmless agreement, where the expectation of both insured and third party is that the contract of insurance will provide protection, like so:

X Corporation hereby agrees to indemnify and hold harmless Y Corporation for any and all claims brought as a result of _______________.

The insurance contract does not provide coverage for any and all claims; it provides coverage for bodily injury, death, and property damage as declared within the terms and conditions of the contract. In a significant number of instances, neither insured nor their counsel or counsel representing a third party understand the separation of the insured risk and the contractual obligation.

Clearly, the contract between an indemnitee and indemnitor is a legal agreement to be found as law either at the time of execution or at point of adjudication. Likewise, the contract of insurance between an insured and insurer is also a legal agreement, subject to the terms and conditions of the insurance policy, which will be found as law either at the time of execution, loss, or adjudication.

Common Mistakes

In issuing a certificate of insurance it is critical to consider the exact language used to add an additional insured. Don't make the mistake of framing the certificate by adding a specific contract designation without adequate language addressing potential liabilities, which may well be uninsurable. This can create substantial legal liabilities on the issuer and perhaps the insurer.

The next landmine deals with required notice to third parties. This notice on the certificate is often amended so that the words "endeavor to" are struck, and the words "the insurer shall" are put and in its place is inserted, "the insurer shall." Additionally, there will be instances where the insurer is obligated to advise a third party of claims which impair not only a lead layer of coverage, but excess layers. It is imperative that these contractual obligations be closely monitored.

If the broker/agent has permission to issue certificates of insurance, these certificates must comply with the agreement between issuer and insurer as well as between the named insured and the additional insured.

Reinsurance Implications

All of this activity becomes a lot more risky if the placing broker is also the reinsurance intermediary, and contractual obligations of the insured become part and parcel of those segments of risk. It is important to be sure that all of the covers read alike, with no discrepancies, no odd dates, no nothing!

Keep It Consistent

Over the years, I have been a strong proponent of negotiating very broad primary commercial liability policies with the excess coverages simply being "towers" on a true follow form basis. When you think about it, especially where certificates are being issued on excess placements, it makes sense. Umbrellas excess of primary, despite the wording "that the coverage provided hereunder shall be no less broad than the primary," does leave holes, especially when some umbrellas provide "pay on behalf of" while others "indemnify," not to mention the significant differences in standard wording.

You ought to see the "fun" relating to the placement of major airlines, for example, with contractual obligations to airports, engine manufacturers, hull manufacturers, hotels and tourist operations where the "usual" aviation insurance contract is limited in scope, which requires you to place a major DIC contract providing "everything" that isn't in the primary. Then start issuing a few hundred certificates.

Fair warning: the issuance of certificates of insurance is dangerous. Don't step on a mine—it's deadly.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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