Before the Association for Cooperative Operations Research
and Development (ACORD) was established in 1976, courts
routinely held that certificates issued by insurance agents with
at least apparent authority were operative legal documents that
could either (a) operate as the functional equivalent of an
"endorsement" amending the terms of the underlying policy or (b)
serve as a basis to estop the insurer from denying coverage as
represented in a certificate. See, e.g.,
Strain Poultry Farms,
Inc. v. American S. Ins. Co., 128 Ga. App. 600, 197
S.E.2d 498 (Ct. App. 1973) (where terms of certificate and
policy conflicted, terms of certificate controlled);
United Pac.
Ins. Co. v. Meyer, 305 F.2d 107 (9th Cir. 1962)
(insurer was estopped from denying coverage for subcontractors
as represented in certificate).
Over the decades, numerous
state and local statutes, regulations, and ordinances applicable
to various government functions—particularly procurement and
licensing—were written to invoke those common law principles.
That is, the laws were written in such a way as to require that
certificates submitted to certain state and local authorities
must contain a statement that the insurer will not cancel the
policy without giving the authorities a set number of days'
notice ahead of time. Sometimes this was accomplished by the
state or local agency creating its own certificate of insurance
form and requiring the public to use it exclusively when
transacting administrative business.
The "Endeavor To" Dilemma
In 1976, insurers banded together to establish ACORD,
whose mission, in part, was to develop standard forms for use by
the insurance industry. This included a set of insurance
certificates containing legal disclaimers saying the certificate
would not "amend, extend, or alter" the insurance policy. As a
compromise on the subject of cancellation, the old ACORD
certificates stated that the insurer would "endeavor to" provide
notice, but the failure to do so would not create liability on
the part of the insurer.
After 1976, a risk management
practice evolved whereby certificate holders required that the
"endeavor to" language and its associated disclaimer be stricken
from the ACORD certificate form. Based on the pre-1976 cases
like Strain Poultry Farms interpreting certificates
as the functional equivalent of policy "endorsements," the
thinking was that, by modifying the ACORD certificate, the
holder might be able to transform it from a mere "snapshot" of
information into a document that had real legal effect.
DOI
Bulletins
To combat that practice, an increasing number of
state DOIs have unilaterally issued bulletins taking the position that modifying
an ACORD certificate in an effort to create a right of notice of
cancellation in favor of the certificate holder that was not
reflected in the underlying policy terms amounted to a
"misrepresentation" that could potentially subject an insurance
agent to disciplinary action. The DOI certificate bulletins
instructed agents not to do that.
However, none of the DOI
certificate bulletins addressed the conflict they created with
longstanding statutes, regulations, and ordinances in their
states requiring agents to insert statements in certificates
given to public authorities promising them a right of notice of
cancellation. If notice of cancellation endorsements in favor of
public agencies are unavailable
in the marketplace, an agent could not comply with both the bulletin
and the law. Although there
are probably dozens and dozens of such conflicts, here are a few
examples:
Arizona—Regulatory Bulletin
2011–01[1][1] prohibits an insurance agent from issuing a
certificate of insurance that "include[s] language that attempts
to amend, extend, or alter the coverage of the underlying
policy" or "suggests the existence of certain contractual
rights" that are not reflected in the terms or conditions of the
policy. Among other things, this bulletin conflicts with Ariz.
Admin. Code § R17–5–604.C.8, which requires that certificates
submitted to the Arizona Department of Transportation (DOT) on behalf
of manufacturers of ignition interlock systems must contain a
statement that "the insurance company will notify the [Motor
vehicle] Division as least 30 days before canceling the product
liability policy." If a notice of cancellation endorsement is
unavailable, but an agent nevertheless issues a certificate with
a 30-day notice of cancellation as required by the DOT
regulation, he or she would be in violation of the DOI
certificate bulletin.
Florida—Informational
Memorandum OIR–03–003M (Florida's version of a bulletin) states
that "altering" or "printing" certificates of insurance "to
incorporate clauses that attempt to modify the terms or
conditions of the policy" amounts to a “misrepresent[ation]"
subjecting the agent to license discipline and
administrative fines. Among other things, this
informational memorandum conflicts with Rule
14–61.0016, Fla. Admin. Code, which requires
that certificates submitted to the Florida
Turnpike Enterprise (FTE) on behalf of operators
of turnpike tandems "shall ... provide that the
coverage under the policy may not be canceled
without 30 days' prior notice, in writing, to
the Executive Director of the [FTE]." If a
notice of cancellation endorsement is
unavailable, but an agent nevertheless issues a
certificate with a 30-day notice of cancellation
as required by the FTE regulation, he or she
would be in violation of the informational
memorandum.
Idaho—Bulletin
No. 08–03 states that certificates "may not be
used to alter, expand, or in any way modify the
terms of the underlying policy." It goes on to
state that "a person who issues a certificate of
insurance that is inconsistent with the
underlying insurance policy is misrepresenting
the terms of an insurance policy and may be
subject to administrative or even criminal
penalties for violating Idaho law." Among other
things, this bulletin conflicts with Idaho Code
§ 44–1603(2)(e), which requires that
certificates issued to the Department of Labor
(DOL) on behalf of farm labor contractors must
provide that the insurance may not be canceled
without 30 days' notice to the DOL. If a notice
of cancellation endorsement is unavailable, but
an agent nevertheless issues a certificate with
a 30-day notice of cancellation as required by
the DOL statute, he or she would be in
violation of the DOI certificate bulletin.
Reinterpretation Does Not Resolve the Problem
The above conflicts
could not be reconciled by interpreting the certificate statutes
and regulations as implicitly requiring that the underlying
policy must contain a notice of cancellation endorsement, in
which case, issuing a certificate showing notice of cancellation
would not be a "misrepresentation" under the bulletins.
Generally, certificate statutes and regulations are written one
of three ways:
(1) to require that notice of cancellation be
given as a matter of law, regardless of what the certificate or
the underlying policy says;
(2) to require that a notice of
cancellation endorsement be added to the underlying policy (in
which case the certificate would match the policy); or
(3) to
require that the certificate must state that the insurer will
give notice of cancellation, regardless of what the underlying
policy says.
Each of the above examples is drawn from the
third category. They are clearly based on court cases like
Strain Poultry Farms, which say that a certificate
itself can be an operative legal document that modifies the
policy. Under that view, there is no need for the insurer to
develop a separate endorsement. An agent's statement in the
certificate is sufficient.
Addressing the Conflict
If
there is a market willing to provide a notice of cancellation
endorsement in favor of certificate holders, such as public
entities, and if the agent is able to procure one, then issuing
a certificate reflecting the policy right of notice would comply
with both the DOI certificate bulletin and state law. The
problem is that such endorsements are still a rarity. Few
insurers offer them, and Insurance Services Office, Inc., has no
plans to develop one.
If an agent with uncooperative markets
finds herself or himself caught between a state statute or
regulation requiring certain statements in a certificate of
insurance on the one hand, and a DOI certificate bulletin
prohibiting such conduct on the other, it would be advisable to
seek legal counsel immediately. Depending on nuances of state
law, here is what an attorney might say.
Statutes and
regulations carry the force of law, whereas
DOI bulletins probably do not. Bulletins are better thought
of as advisory opinions giving parties a "heads up" as to how
the DOI intends to treat an issue or problem. But they are not
legally binding. Given a conflict between the two, it is likely
that an attorney will conclude that an agent must follow the
certificate statute or regulation, not the DOI certificate
bulletin.
Personnel at the other state agencies are likely to disregard
the DOI certificate bulletin and continue to insist that
certificates submitted to them must comply with their statutory
and regulatory directives. A DOI bulletin, by itself, could not
repeal them. Unavailability of notice of
cancellation endorsements in the marketplace is irrelevant to
the operation of their certificate statutes or regulations,
because under court cases like Strain
Poultry Farms, notice of cancellation in a certificate
controls over the terms of the policy.
Personnel at the state DOIs are probably aware that other
state agencies have statutes and regulations on their books
requiring certificates to contain statements that are not
supported by the underlying policy. It is unlikely that the DOI
certificate bulletins were meant to address what other state
agencies are doing.
It would seem unlikely that a DOI would take disciplinary
action against an agent for following state law. Agents caught
in this predicament should make the DOI aware of the problem and
secure a written assurance that the DOI will not prosecute the
matter if an agent issues a certificate in violation of the
bulletin.
It would be unacceptable from a public policy
standpoint if
the DOI takes the position that, if a notice of cancellation
endorsement is unavailable, the agent may not issue the
certificates required by other state agencies. That would mean the
subject economic activity would be shut down completely. In Arizona, manufacturers could
not obtain a license to sell ignition interlock systems to
curtail drunk drivers. In Florida, trucking companies could not obtain permits to operate
turnpike tandems. In Idaho, farm labor contractors could not obtain a license to work
in that state's potato fields. Nobody wants that.
Conclusion
It would have been preferable if the DOI certificate bulletins had
not created conflicts with certificate statutes and regulations
on the books at other state agencies. A better course of action
would have been to have negotiated a comprehensive legislative solution that
takes into account not only the problems of insurers and
agents in handling certificates, but also the
concerns of the other state agencies, which have a legitimate
public policy interest in being notified of cancellations.
Unless all state agencies can agree on their approach to
certificates of insurance, DOIs should consider withdrawing
certificate bulletins that conflict with state law to avoid
further confusion.