Author: Bill Wilson
Courts have generally held that certificates of insurance are not contracts and, therefore, not enforceable. However, this doesn't mean that agents are insulated from lawsuits involving certificates of insurance under several legal premises. This article explores a number of court cases dealing with certificates of insurance.
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Courts around the country have generally held that a certificate holder has no legal recourse against an agency or insurer because of a lack of privity of contract, specifically that no consideration has been made on the part of the certificate holder so, therefore, no contract exists.
For example, in the often cited case of United States Pipe & Foundry Co. v. United States Fidelity & Guaranty Co., 505 F.2d 88 (5th Cir. 1974), the court ruled that the certificate did not grant contractual rights since there had not been any exchange of consideration as required to effect a valid, enforceable contract.
In Lezak & Levy Wholesale Meats, Inc. v. Illinois Employees Insurance Co., 460 N.E.2d 475 (Ill. Ct. App. 1984), the court refused to permit the coverages implied on the certificate to supersede those actually provided under the insurance contract based on the fact that the certificate, according to its clear wording, was not part of the policy. A similar ruling was made in Pekin Insurance Co. v. American Country Insurance Co., 572 N.E.2d 1112 (Ill. Ct. App. 1991).
In Bradley Real Estate Trust, et al. v. Plummer & Rowe Insurance Agency, Inc., 609 A2d 1233 (Sup. Ct. NH, 1992), the court said, “In effect, the certificate is a worthless document; it does no more than to certify that insurance existed on the day the certificate was issued. We leave it to the legislature or to the future bargaining of the parties to rectify inequities in the notification process.”
More recently, in Glynn v. United House of Prayer For All People, 741, N.Y.S.2d 499 (N.Y. App. Div., 2002), the court ruled that the premises owner was not named as an additional insured on liability policies issued to the owner's general contractor, thus precluding the liability insurer's alleged obligation to defend and indemnify the owner in actions arising from a fire, notwithstanding the fact that the general contractor's agent had provided the owner with a certificate of insurance.
One issue that is often raised is whether or not the ACORD "will endeavor to" language creates any rights to notice of cancellation for a certificate holder. Recently, in Nazami v. Patrons Mutual Insurance Company, Nos. 17537, 17539, Atlantic Reporter 2d 209, December 5, 2006, the Connecticut Supreme Court ruled that failure to provide notice of cancellation under the ACORD certificate did not constitute fraud or negligence. The fraud allegation was dismissed largely because of the disclaimer language on the form and the negligence allegation was dismissed because the certificate holder was owed no duty of care and the certificate was issued "as a matter of information only," conferred no rights on the holder and did not constitute a contract between the holder and agent, again largely because of the disclaimer language.
A similar "endeavor to" decision was reached by the West Virginia Supreme Court in Camastro v. Dlesk (1997). However, the WV court cited John Bader Lumber Company v. Employers Insurance (Ill. App. Ct. 1982) as an example of a case where the insurer was found liable for failure to notify of cancellation. For more information, refer to the "Certificates Lacking Disclaimer Language" topic below.
In addition, where there is an implication that the certificate might be a part of the policy or controlling thereof, several courts have ruled in favor of the certificate holder. Such cases include:
Sumitomo Marine and Fire Ins. Co. v. Southern Guaranty Ins. Co. and Columbia National Ins. Co., 337 Fed. Supp. 2d 1339 (U.S. Dist. Ct. No. Dist. Georgia 2004). The agent’s two insurers had to protect the developer, covered by Sumitomo, who relied on a certificate representing additional insured status where the policies were not endorsed. The court relied on Don Malecki’s The Additional Insured Book and his affidavit.
Marlin v. Wetzel County Board of Education, 569 S.E. 2d 462 (Sup. Ct. of App., W. Va. 2002). This case was resolved with the same result as Sumitomo, where the court relied on the The Additional Insured Book.
Brown Mach. Works & Supply Co. v. Ins. Co. of North America, 659 So. 2d 51, 56 (Ala. 1995). The court held that an insurance company that does not deliver a policy to a certificate holder is estopped from asserting exclusions contained in the policy but not revealed in the certificate.
Moore v. Energy Mut. Ins. Co., 814 P.2d 1141, 1144 (Utah App. 1991). The court held that exclusions are invalid unless they are communicated to the certificate holder in writing.
International Amphitheatre v. Vanguard Underwriters Ins. Co., 532 N.E. 2d 493 (Ill. Ct. App. 1988). In this case, the court contrasted this decision with their earlier Lezak and Pekin decisions (see above) because the certificates in those cases clearly stated that they were not part of the insurance contract.
City of Northglenn v. Chevron USA, Inc., 634 F. Supp. 217, 225 (D. Colo. 1986).
J.M. Corbett Co. v. Insurance Co. of N. Am., 357 N.E.2d 125 (Ill. Ct. App. 1976). The court held that because an exclusion was not provided to certificate holder, the terms of the certificate controlled.
White Motors Corp. v. Northland Ins. Co., 315 F. Supp. 689, 693 (D. S.D. 1970).
These cases (along with insurance department directives) illustrate the importance of agents not unilaterally revising certificate wording or issuing proprietary certificates that have not been tested in court. Attorneys and risk managers will often counsel their employers or clients to reword certificates to clearly state that they are part of the contract and that they grant an enforceable interest in the policy to the certificate holder.
Similarly, in Horn v. Transcon Lines, Inc, 7 F3d 1305 (7th Cir. 1993) discussed below, the court found that the certificate was so misleading that the limitations on the scope of coverage in the policy could not be relied upon. These cases illustrate that, while there is general legal consensus that certificates do not create contractual obligations or rights, there are exceptions based on unique circumstances. In addition, a certificate holder could conceivably seek redress based on other legal grounds when certificates are inaccurate or imply rights due to their proprietary nature or diversion from “standard” wording.
For additional information, check out the article, “Certificates Of Insurance in Construction Accident Coverage Litigation: The Disclaimer Language Is Effective” by James P. Marsh (see Appendix) which cites several other court cases and concludes with, “However, where the certificate of insurance does not contain the disclaimer (or where the agent/broker modifies the standard disclaimer in such a way as to eliminate the operative language), the insurer cannot rely on policy provisions inconsistent with the terms of the certificate of insurance.”
The following cases illustrate that relying on the premise that certificates are not contracts and cannot result in agency liability is foolhardy.
For example, for the first time, a New York appellate court ruled in a majority decision in 2005 that an agent might be liable for fraud in issuing a certificate upon which a third party relied:
Binyan Shel Chessed, Inc. v. Goldberger Insurance Brokerage, Inc., 2005 WL 1164019 (App. Div., 2nd Dep't, May 16, 2005)
The plaintiff contracted with the defendant American Building Corporation (hereinafter American) to perform renovation work on its premises. Goldberger Insurance Brokerage, Inc. (hereinafter Goldberger), which is American's insurance broker, delivered a "certificate of liability insurance" to the plaintiff stating that American had liability insurance with Colonial Cooperative Insurance Co. (hereinafter Colonial) and that the plaintiff was an additional named insured. The certificate was dated July 15, 1999, and stated that the policy number was ACC5449828 with a policy term running from December 1, 1998, until December 1, 1999. The certificate further stated that it was "issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below."
On or about July 20, 1999, a worker for one of American's subcontractors was injured on the plaintiff's premises. In this action against, among others, Colonial, Goldberger, and American, the plaintiff seeks damages and a judgment declaring that Colonial is obligated to defend and indemnify it for the accident. Colonial moved for summary judgment, stating that a search of its records revealed no policy insuring either American or the plaintiff, and that it never issued a policy which began with the letters "ACC."
Goldberger separately moved for summary judgment on the grounds, inter alia, that there was no privity of contract between it and the plaintiff, and the certificate of insurance contained a disclaimer that it conferred no rights on the certificate holder. Goldberger's president, Chaim Goldberger, submitted an affirmation which stated that American was one of Goldberger’s customers but Goldberger never received payment from American for the subject Colonial policy, and accordingly, "the policy was never procured."
Since there was no privity of contract between Goldberger and the plaintiff, the plaintiff cannot recover from Goldberger for its pecuniary loss "absent evidence of fraud, collusion, or other special circumstances" (Calamari v Grace, 98 AD2d 74, 83; see Good Old Days Tavern v Zwirn, 259 AD2d 300; Metral v Horn, 213 AD2d 524, 526). However, "a cause of action sounding in fraud does not require the existence of a relationship of privity or something close to privity between the parties" (Metral v Horn, supra at 526). Under the particular facts of this case, summary judgment to Goldberger at this juncture would be premature. The certificate was issued over six months after the policy purportedly went into effect. Therefore, a question arises as to why Goldberger was not aware that the policy had not been paid for at the time the certificate was issued. Further, a question arises as to how Goldberger came to use a policy number with a prefix which was never a policy prefix in existence for this carrier. Depositions should therefore be held.
It is well settled that the duty of an insurance broker runs to its customer and not to any additional insureds since there is no privity of contract for the imposition of liability (see St. George v Barney Corp., 270 AD2d 171, 172; see also Halali v Vista Envts., 245 AD2d 422). The majority opinion acknowledges that there was no privity of contract between Goldberger and the plaintiff, and thus the plaintiff cannot recover from Goldberger unless there is evidence of "fraud, collusion or other special circumstances." However, the majority concludes that the circumstances of the case, including the fact that the certificate of insurance was issued six months after the insurance policy allegedly went into effect, raises issues of fact concerning the "possibility of fraud and collusion between Goldberger and American," the contractor for whom Goldberger was to obtain the subject insurance….
In Goldberger, the court indicated that privity of contract might not be necessary if the allegation is that a loss arose as a result of alleged fraud on the part of an agent. In a subsequent case, the New Hampshire Supreme Court held for the certificate holder against the insurer:
Handley v. Providence Mutual Fire Insurance Company, 898 A.2d 492 (NH Sup. Ct., 2006)
According to the court, "[T]he certificate here does not clearly indicate that it is issued for 'information only' or that it 'confers no rights upon the certificate holder.'
"Moreover, the parties do not dispute that Olivier [agent] knew that Miles [insured] had no insurance through Providence when he faxed the certificate to Handley [certificate holder]. [T]he certificate in this case did not even accurately certify that coverage existed on the day it was issued.
"In this case, Olivier, Providence's authorized representative, admits that the certificate supplied false information to Handley.
"For these reasons, we conclude that the trial court erred in concluding that Bradley [another court case] compelled it to grant summary judgment to Providence. Reversed and remanded."
Still, despite these rulings, some courts refuse to enforce certificates even if alleged to be fraudulent. See, for example, Alabama Electric Cooperative, Inc., et al. v. Bailey's Construction Company, Inc. (Ala. Sup. Ct. 2006).
Ostensible Agency Authority
In another case, it was determined that an agent’s apparent authority to issue standard certificates attesting to additional insured status could implicate an insurance company:
American Casualty Co. of Reading, PA v. Krieger, 181 F.3d 1113 (9th Circuit, 1999)
The Court of Appeals for the Ninth Circuit has held that an independent broker may have ostensible authority to extend additional-insured coverage on behalf of a carrier even though it had no actual binding authority and even though the carrier never issued or been paid a premium for an additional-insured endorsement. Doing business as Playscool Productions, Zweig promoted and produced an annual entertainment event known as "Playscool." Krieger contacted Zweig about performing bungee jumping demonstrations. Zweig agreed, provided that he was named as an additional insured to Krieger's liability policy with American Casualty Company. Krieger subsequently contacted his insurance broker, SEIS, and SEIS issued a certificate of insurance listing Zweig and Playscool Productions as additional insureds. SEIS, however, never actually obtained an additional insured endorsement from American Casualty covering Zweig or Playscool Productions.
While rehearsing for a Playscool event, two individuals were seriously injured and subsequently filed suit against Zweig and Krieger. Both tendered the suit to American Casualty. American Casualty denied their claims based on an exclusion in the policy which excluded coverage for injuries sustained while participating in a sporting event. American Casualty also denied Zweig's claim because neither Zweig nor Playscool Productions were listed as additional insureds on the policy. Judgment in state court was eventually entered against Zweig for approximately $4.2 million. American Casualty then filed a declaratory relief action in federal court. The district court granted American Casualty's motion for summary judgment, finding that Zweig could not show that he was an additional insured under Krieger's policy.
The Ninth Circuit reversed and ruled that Zweig had raised a triable issue of whether SEIS was American Casualty's "ostensible agent." The Court rejected American Casualty's argument that it could not be liable under an ostensible agency theory because Zweig did not have any direct communications with American Casualty or its underwriting agent, AON. The Court also rejected American Casualty's argument that, because the certificate of insurance issued to Zweig was a standard form that is widely used in the insurance industry and did not have American Casualty's named printed anywhere on the form, there was no evidence to support Zweig's claim that SEIS was authorized to name Zweig as an additional insured.
The Court explained that one can be liable under an ostensible agency theory "where the principal knows that the agent holds himself out as clothed with certain authority, and remains silent." The Court noted that testimony established that SEIS fielded many requests for certificates of insurance and that American Casualty's agent, AON, had received a fax from SEIS forwarding Krieger's initial application for insurance and his request to add Zweig as an additional insured. In the Court's view, this was sufficient to show that AON planned to issue a certificate of insurance to Zweig before the particular bungee jumps took place.
American Casualty countered that it generally requires an additional fee, reviews proposed certificates of insurance and issues an endorsement to the policy before it agrees to add an additional insured. American Casualty also pointed out that the standard form certificate of insurance in question expressly stated that it was issued for informational purposes only and that it did not "amend, extend or alter the coverage afforded by the policies." The Court nonetheless found these facts irrelevant to the issue of whether SEIS had ostensible authority to issue certificates of insurance which serve as notification to insureds that they are covered under a policy.
The Court noted that evidence indicated that AON and American Casualty were aware that SEIS: (1) used standard form certificates to notify others that additional insured coverage existed; and (2) held itself out as authorized to issue such certificates. The Court found that silence in the face of such knowledge could create ostensible agency. The Court also observed that it was logical that one who has obtained insurance through a broker would ask the same broker to have an additional insured added to the policy "...and that once that broker issues a certificate of insurance identifying the additional insured, the broker in fact had the carrier's authority to bind coverage for that added risk."
Obviously, IF an insurer is held accountable to an insured or certificate holder based on apparent or ostensible authority, then the carrier might proceed against the agent on several legal grounds ranging from an agency/company agreement contract violation to fraud.
Deceptive, Incomplete, or Misrepresentative Certificates
Applying California insurance law, while a certificate normally describes only the general nature of the coverage, and required a person to consult the master policy to determine its full terms and details, the certificate was so misleading that the contents of the policy could not be called details or elaborations.
Horn v. Transcon Lines, Inc., 898 F.2d 589, 593 (7th Cir.1990)
While hauling a load of freight for Jeffries Trucking, Thurmond drove his rig off the road. Thurmond died, and his passenger, Horn, was seriously injured. Horn sued for personal injury damages.
At the time of the accident, Thurmond had procured "deadheading" and "bobtailing" insurance issued by Liberty Mutual pursuant to a lease with Transcon Lines. The "Certificate of Automobile Insurance" showed coverage to "Specified Lessors to Keystone Lines," describing Thurmond as an additional insured, showing bodily injury and property damage combined single limit of $500,000. The certificate implied that Thurmond had liability insurance for the operation of the truck.
Unknown to Jeffries Trucking, however, this insurance policy prohibited Thurmond from driving for companies not on a set "list of carriers" cooperating with Transcon Lines. Thurmond had leased his truck to Transcon Lines. Nonetheless, Thurmond continued to drive for Jeffries Trucking. When Jeffries Trucking insisted that all persons supplying transportation of cargoes also supply insurance, Thurmond displayed a "Certificate of Automobile Insurance" issued by Liberty Mutual. Thurmond knew, though Jeffries Trucking did not, that Thurmond's coverage under Liberty Mutual did not apply. The certificate did not spell out the limitations on the scope of the insurance.
The trial court held that Horn was entitled to damages, and that Jeffries Trucking, which paid Horn, was entitled to indemnity of $518,000 from Thurmond's estate, which Liberty Mutual had to pay on the estate's behalf. Liberty Mutual appealed, contending that the policy did not cover Thurmond at the time of the accident, and that its liability could not exceed the policy limit of $500,000.
The appellate court held that Jeffries Trucking was entitled to indemnity from Liberty Mutual. The court stressed that an insurer may not enforce vital limitations or exclusions missing from the certificate of insurance. While the California Insurance Code stressed that a certificate described only the general nature of the coverage, and required a person to consult the master policy to determine its full terms and details, the certificate sent to Thurmond was so misleading that the contents of the master policy could not be called details or elaborations. Moreover, Liberty Mutual's formal policy was not even issued at the time. As of the date of the accident, the certificate was the policy, rather than just evidence of coverage under some more elaborate document.
In another case, the court found that the certificate might override the policy in some cases:
Marlin v. Wetzel County Board of Education, 569 S.E. 2d 462 (Sup. Ct. of App., W. Va. 2002)
"We therefore hold that a certificate of insurance is evidence of insurance coverage, and is not a separate and distinct contract for insurance. However, because a certificate of insurance is an insurance company's written representation that a policyholder has certain insurance coverage in effect at the time the certificate is issued, the insurance company may be estopped from later denying the existence of that coverage when the policyholder or the recipient of a certificate has reasonably relied to their detriment upon a misrepresentation in the certificate."
Note: Digressing a moment, another important lesson of Marlin v. Wetzel involves the issue of when insurers tell agents NOT to send copies of certificates to the carrier. It has long been an E&O practice to recommend that agents send certificates anyway. Marlin provides one reason for this when "[t]he insurance company asserted that it never received the certificate of insurance or any other document suggesting the insurance policies needed to be amended" to make the Board an additional insured. According to the court, "[The insurer] does not dispute that its agent issued a certificate of insurance listing the Board as an additional insured. Instead, [the insurer] argues that it had no knowledge of the certificate's existence, and therefore could not modify the actual policy to include coverage for the Board."
These decisions conflict with many from other jurisdictions, including Lezak & Levy Wholesale Meats, Inc. v. Illinois Employees Ins. Co., 460 N.E.2d 475 (Ill. Ct. App. 1984) and Pekin Ins. Co. v. American Country Ins. Co., 572 N.E.2d 1112 (Ill. Ct. App. 1991), perhaps since the insured knew that the exposure for which the certificate was offered was excluded.
In their article, “Certificates of Insurance: The Illusion of Protection,” attorneys Alfred S. Joseph III and Arthur E. Pape cite John A. Appleman, Insurance Law and Practice, § 9143 (1981) by opining that “a certificate holder is generally charged with knowledge of the terms of the main policy…[and] has a duty to examine the policy within a reasonable time after receipt of the certificate and to contact the insurer regarding any discrepancies.
If it’s any indication of the level of ignorance, neglect, misrepresentation, or fraud, an International Risk Management Institute survey of its email newsletter readers elicited the following from a general contractor:
“Our requirement used to be that the subcontractor's certificate include a statement that our company and the owner were named as additional insureds. Some years ago, I conducted a random survey of subcontracts, selecting a sample of 20, and found that in 8 of the cases (40 percent), we had not in fact been named, despite the required statement having been typed on the certificate.
“If there is a serious loss, I for one do not wish to rely on either some doubtful claim against an agent's E&O policy, or a breach of contract claim against a subcontractor to protect our program. So, we now require one of two documents in addition to the certificate: i) A copy of the additional insured endorsement itself (automatic or scheduled), or ii) a letter from the agent to the insurance company requesting the endorsement.”
Certificates Lacking Disclaimer Language
In John Bader Lumber Company v. Employers Insurance, 441 N.E.2d 1306 (Ill. App. Ct. 1982), John Bader Lumber Company leased property to American Can Company. American Can obtained liability coverage from Employers Insurance of Wausau for the property subject to the lease. The building on the leased premises was severely damaged by fire on February 14, 1979. There was evidence that Bader and American Can agreed to terminate the lease after the fire. On April 5, 1979, someone was injured when a wall of the burned building collapsed, and he sued the lessor, Bader.
American Can's insurance company refused to defend, saying that its coverage ended when the lease terminated. The Illinois appellate court looked to the certificate of insurance issued to the lessor, Bader. The certificate in that case required ten days' written notice of cancellation to the certificate holder. Because the lessor had not received such notice, the court found that the policy was still effective on the date of the accident. Bader therefore supports not an affirmative duty to notify, but rather enforcement of the cancellation provision on the certificate of insurance.
Note that in Handley v. Providence Mutual Fire Insurance Company discussed above, the court acknowledged that, while the certificate contained disclaimer language, it was insufficient: "[T]he certificate here does not clearly indicate that it is issued for 'information only' or that it 'confers no rights upon the certificate holder.'" This indicates that the specific disclaimer language of a certificate may be critical in determining whether the certificate holder has any legal grounds for relying on the certificate and, if inaccurate or misleading, legal recourse against the issuing agent or insurer.
In J.M. Corbett Co. v. Ins. Co. of North. America, 43 Ill.App.3d 624, 357 NE2d 125 (1976), a certificate had been issued by a subcontractor to a general contractor which stated that the sub would indemnify the general for “all claims for injury or damage” [emphasis added]. Needless to say, ALL general liability policies incorporate exclusions. In this case, the exclusion applied to rented motor vehicles. The court ruled that the indemnity clause in the certificate controlled and the insurer was forced to provide coverage for an excluded exposure to the additional insured general contractor due to his interest in the policy.
However, contrast this with decisions based on ACORD form language, as outlined in T.H.E. Insurance Company v. City of Alton, 227 F.3d 802 (7th Cir. 2000):
Two lines of Illinois cases address the issue of coverage when there is a certificate of insurance separate from the policy itself. In one line of cases, where the certificate did not refer to the policy, and the terms of the certificate conflicted with the terms of the policy, the courts found that the certificate language should govern the extent and terms of coverage. See International Amphitheatre Co. v. Vanguard Underwriters Ins. Co., 532 N.E.2d 493, 502 (Ill. App. 1 Dist. 1988) (where the terms of the certificate conflicted with the terms of the policy, the insured was not aware of the exclusions in the policy, and the certificate did not warn of further exclusions, the certificate would govern the terms of the insurance contract); John Bader Lumber, 441 N.E.2d at 1308 (same); J.M. Corbett Co. v. Insurance Co. of North America, 357 N.E.2d 125, 127-28 (Ill. App. 1 Dist. 1976) (same).
But where the certificate refers to the policy and expressly disclaims any coverage other than that contained in the policy itself, the courts found that the policy should govern the extent and terms of the coverage. See American Country Ins. Co. v. Kraemer Brothers, Inc., 699 N.E.2d 1056, 1060 (Ill. App. 1 Dist. 1998) (where the certificate of insurance contains a disclaimer, the insured may not rely on the certificate but must look to the policy itself to determine the scope of coverage); Pekin Ins. Co. v. American Country Ins. Co., 572 N.E.2d 1112, 1114-15 (Ill. App. 1 Dist. 1991) (where the certificate of insurance contains a disclaimer and there is no conflict between the terms of the certificate and the terms of the policy, the insured will be held to the terms of the underlying policy); Lezak & Levy Wholesale Meats, Inc. v. Illinois Employers Ins. Co. of Wausau, 460 N.E.2d 475, 477 (Ill. App. 1 Dist. 1984) (same).