August 13, 2013

A. What is a Certificate of Insurance?

A document issued as proof of insurance coverage to a third party and signed by an insurance agent, broker or insurance company. This confirms the types and limits of insurance carried by an insured. Coverage is verified as of the date the certificate is issued.

B. Why Are Certificates of Insurance Used?

1. Need for a quick and concise way to verify that required insurance coverage’s are in place to support various business transactions.

2. Verifying coverage’s by reading actual insurance policies would be much more burdensome:

a. Tremendous time required

b. Lack of understanding and knowledge of policy terms and conditions by many readers

c. Most importantly – the actual insurance policies often are not available until months after the policies are renewed

d. Need for immediate verification of renewal coverage

C. What are Standard ACORD Certificates and what do They Represent?

1. ACORD 23 – Vehicle or Equipment Certificate of Insurance

2. ACORD 24 – Certificate of Property Insurance

3. ACORD 25 – Certificate of Liability Insurance

4. ACORD 27 – Evidence of Property Insurance

5. ACORD 28 – Evidence of Commercial Property Insurance

D. What do Certificates of Insurance Confirm?

1. Proof of Coverage to you or your client from a vendor, contractor, landlord, or entity with permitted use of your property such as when they are:

a. A vendor or other firm providing goods or services to you

b. A contractor performing work on your property or for you

c. A tenant occupying your property

d. Any other firm or individual doing other work on your behalf

2. Proof of Coverage from you or your client to an outside party such as:

a. To a Lender or other creditor providing financing to you,

b. To a Lessor or Owner related to your lease of premises or equipment,

c. To a Government Agency of other party.

E. How do Certificates of Insurance Differ From Insurance Binders?

1. An insurance binder is issued at the time an insurance policy renews as temporary proof of the coverage’s provided. It is typically only issued for a 30 to 60 day period and must be extended monthly until the actual insurance policy is issued.

2. Binders are typically issued directly to the Named Insured for each policy and are not intended to cover or represent insurance to other parties.

3. Binders can be relied upon as actual proof of coverage provided to the

Named Insured they are issued to until the insurance policy is issued.

4. In contrast, certificates of insurance are issued once a year and intended to provide verification of insurance to additional insured’s and other parties.

F. Why are Certificates of Insurance so Important?

1. As independent verification that the outside party is in compliance with the insurance provisions of various contracts and agreements and that the additional insured’s or certificate holder’s interests are properly protected.

2. Provides assurance that the Named Insured has insurance to cover losses or damages it may be legally obligated to pay.

3. Extends insurance protection to cover claims and legal defense costs to another party when that other party is contractually required to be protected as an additional insured.

G. Limitations in Certificates of Insurance

1. They are generally informational only.

2. They are not contracts extending insurance coverage’s.

3. They only document the insurance coverage’s, limits and terms provided in the insurance policies listed when they were first issued.

4. The actual limits of insurance available may be reduced by the payment or occurrence of claims.

5. They don’t provide full details on many of the policy terms, conditions and exclusions which may limit coverage.

H. What is the Difference in Coverage Provided Between Various Entities That

May be Covered on a Certificate of Insurance and Corresponding Insurance

Policies?

1. “Certificate Holder” – Is the entity shown on the certificate to whom information concerning the coverage’s listed on the certificate of insurance is provided. No coverage or other rights are extended to the certificate holder on any of the policies shown other than the requirement to “endeavor to mail” notice of cancellation to the Certificate Holder.

2. “Named Insured” – Is the individual or entity shown on the Declarations page of an insurance policy and any other person or organizations qualifying as a Named Insured under the insurance policy – generally, the policyholder. The Named Insured is the individual or entity with whom the insurance contract was made – and has the most rights and responsibilities under the policy. The Named Insured normally applies for coverage, pays the policy premiums, files claims and receives direct protection under the policy.

3. “Insured” – Is any person or organization qualifying for coverage under

“Who is an Insured” under the insurance policy such as – management officers, trustees, employees, or volunteers while acting in the course and scope of their responsibilities.

4. “Additional Insured” – Amends the “Who is an Insured” to add another person or organization. This is added by endorsement either for a specific entity or on a blanket basis. An Additional Insured will only have the extent of coverage offered to other Insured’s or as defined by the endorsement. Coverage as an Additional Insured is limited to the activities of the Named Insured as agreed to by contract or agreement related to the Named Insured’s operations.

5. “Mortgagee” – Is a specific entity whose interest is covered on a property insurance policy issued to the Named Insured. The mortgagee typically has specific rights including:

a. The right to receive direct notice from the insurance company prior to cancellation of the policy for non-payment of premium by the Named Insured,

b. The right to pay any overdue premium and have the policy reinstated to protect its interests,

c. The right to receive property insurance proceeds directly, and

d. Protection against any act(s) by the Named Insured that could void coverage – such as deliberately causing a loss or violating a policy requirement (such as maintaining sprinklers) – so that property insurance coverage will still be provided to the “innocent” mortgagee.

6. “Loss Payee” - is an entity who will be included on any check payable for a covered property loss under the policy. A Loss Payee is typically issued for leased equipment or other insured personal property.

Author: Frank A. Mayer, III
Partner in the Financial Services Practice Group at Pepper Hamilton LLP

For more information regarding certificates of insurance or other great continuing education topics, visit Lorman Education at www.lorman.com.