Expert Commentary

DOI Certificate Bulletins May Conflict with State Law

The departments of insurance (DOIs) of about 30 states have issued bulletins prohibiting agents from making statements in a certificate (e.g., that the certificate holder will be given notice of cancellation) that are not supported by actual policy language. Unfortunately, many of these DOI certificate bulletins have set up an internal conflict with their own state law.


October 2011

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.


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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