Author: Bill Wilson
All too often, agents are asked by third parties to sign an "agent affidavit" attesting that an insured's insurance program complies with a contract the insured has signed with that party. Chances are, your customer has no idea of the difference between CGL contractual liability and an indemnity agreement. Many agents don't. Please sit down before you read this article.
Here is a recent "Ask an Expert" question, one similar to dozens and dozens we've received:
Below are excerpts from a contract our insured has entered into. Is this covered under the ISO CGL policy?
4.1 The [insured] will defend, indemnify and release ABC and XYZ, and their subsidiaries, affiliates, successors and assigns (collectively called "Indemnified Parties"), against all claims, causes of action, damages, liabilities, attorneys' fees and related expenses ("Claims") which the Indemnified Parties may suffer or for which the Indemnified Parties may be liable, by reason of actual or claimed injury (including death) to any person or actual or claimed damage to any property, directly or indirectly caused or contributed to, or claimed to be caused or contributed to by reason of any act, omission or negligence, including strict liability, whether active or passive, of the [insured], its employees or its subcontractors, unless caused by the sole negligence or sole willful misconduct of the Indemnified Parties.
4.2.3 The [insured]'s general liability insurance will cover the indemnity agreements and obligations in Paragraph 4.1.
[emphasis added above]
I’ve read tons of indemnity agreements over the years. I have NEVER, EVER, EVER, EVER seen one that a CGL policy fully covered. This is actually one of the less onerous ones I’ve seen. However, the reference to “all claims, causes of action, damages, liabilities, attorneys' fees and related expenses” is something too broad for a CGL policy. The CGL policy covers BI and PD, and optionally AI and PI. It does not cover ALL types of claims and damages. In addition, the “all” wording implies there are no exclusions permitted. The CGL policy has lots of exclusions. These types of agreements often require coverage “without limitation” as well, meaning that you’d have to issue a CGL policy with no limits to be in compliance.
So, the contract requirement that “The [insured]'s general liability insurance will cover the indemnity agreements and obligations in Paragraph 4.1.” is impossible to comply with. Again, NO CGL policy I’ve ever seen will fully comply with indemnity agreements or contract insurance requirements of this type.
Still, unsuspecting agents across the country routinely indicate on certificates or via “agent affidavits” that the insurance program is in compliance with the contract an insured has signed. Increasingly, insurance department statutes, regulations and/or directives are implementing civil and criminal penalties on agents who misrepresent policy coverages. Ohio can impose a $25,000 fine per offense. In Louisiana, fraudulent certificates are subject to a $5,000 and up to 5 years in prison at hard labor. Alabama (and other states) specifically reference "agent affidavits" or "agent opinion letters," with Alabama potentially imposing up to a $10,000 fine for inaccurate affidavits.
If you are attesting that a customer's insurance program fully complies with the contractual insurance requirements s/he has entered into, there is probably a 99% chance what you're saying is not true. For that reason, we strongly suggest that you do not indicate on a certificate or on any kind of separate affidavit that the insurance program of your insured complies with the contract s/he has signed. The certificate and any accompanying policy forms are designed to provide FACTUAL information about the insurance program, not make any kind of qualifying statement that they are in compliance with anything. Look at it this way...it's the certificate holder's contract, so let the certificate holder decide whether the insurance provided meets the contract specs.
This entire issue often belies a fundamental misunderstanding by contract drafters and agents as to the difference between indemnity and insurance. Below are two outstanding IRMI articles authored by VU faculty member Craig Stanovich of Austin & Stanovich Risk Managers, LLC. I strongly encourage your commercial lines producers and CSRs, particularly those involved in the certificate process, to read these articles.
Within the VU library you will find links to several on demand webinars focused on certificates of insurance. Before issuing another COI, it would be well worth your time to attend one of these sessions.
“One of the pleasures of leaving the independent agency/brokerage world to move to a risk management role was not having to try to find ways to address and control the almost unbearable pressure placed on agency personnel to issue improper, incorrect, misleading, and otherwise wrong certificates. A salesperson or customer screaming that the customer isn't going to get paid for work already performed, or is being prevented from performing work for which they've already contracted, unless and until you do exactly what has been required is a powerful incentive to take the easy way out, issue the darned thing, and let someone else worry about the E&O claim which might well result if a particular series of misfortunes ensue.”
M. Lyn Martin, CPCU, RPLU, ARM, ARe
California Casualty Management Co.
Do you feel pressured to issue inaccurate certificates? Do you really understand what constitutes a certificate misrepresentation? Are you familiar with laws that could hold you responsible for incorrect certificates? Does your agency have procedures in place to deal with unusual certificate requests? Did you know that you can’t say additional insured status is provided on a “primary and noncontributory” basis with absolute certainty? What should you do if a certificate holder wants you to strike the “endeavor to” language from the cancellation notice on the certificate? What does it cost to issue a certificate? Do you have clients whose certificate costs exceed the commission you’re receiving from them? Should you be notifying certificate holders of cancellations and nonrenewals? Should you be reviewing your insureds’ construction contracts, leases and loan agreements and, if so, what should you look for? Could you, like one agency, have a $10 million certificate E&O claim? What can you do to minimize the chance you’ll be successfully sued over a certificate of insurance?
Last Updated: July 28, 2020