Agents, lenders face off in continuing battle over certificates

Insurance agents and mortgage lenders each are trying to gain ground in a tug of war over certificates of insurance that is exacerbating a longstanding problem and creating new concerns.

Agents should analyze their operations and adopt more effective loss-control techniques in response to an increasing number of errors and omissions claims related to the insurance certificates requested by third parties, according to a report from the Alexandria, Va.-based Independent Insurance Agents & Brokers of America Inc.

In addition, mortgage lenders are negotiating to tighten some standard certificate of insurance forms. Mortgage lenders want the certificates to reflect the existing wording in the underlying policies, which obligates insurers to notify the lenders when a borrower's property insurance coverage no longer is in force.

Every year, U.S. policyholders request millions of such certificates to provide a snapshot of coverages, sources estimate. Requiring such certification from a lesser party to a contract is an essential risk management tool, although not a trouble-free one.

In a typical scenario, a building contractor asks each subcontractor to provide a certificate that confirms that the subcontractor has general liability and workers compensation insurance and lists the policy limits, or at least stipulates that policy limits meet the contractor's minimum requirements.

Not always business as usual

Sometimes, however, the relationship is more complex when the contractor wants to become an additional insured on the subcontractor's policy, giving the contractor some rights under that policy.

"Certificates of insurance have always been a problem," said David Golden, director of commercial lines for the Des Plaines, Ill.-based Property Casualty Insurers Assn. of America.

There is an ongoing struggle to balance the rights and responsibilities of policyholders, agents, insurers and certificate requesters.

"The current certificate of insurance process is an imperfect solution to a legitimate need," said Jack P. Gibson, president of the International Risk Management Institute, a Dallas-based research and publishing company that specializes in risk management and property/ casualty insurance.

The aim is to inform a third party—such as a contractor, mortgage holder or governmental entity—of the existence and amount of insurance that a policyholder has so that the third party can protect its interests, said Bill Wilson, associate vp of the IIABA's Education and Research Department. He also directs the IIABA's Virtual University that provides online services and publications to members.

Mr. Wilson wrote the IIABA's 53-page white paper, "Certificates of Insurance: Issues and Answers." According to his analysis, three problems stand out as most significant.

The first involves large companies and governmental entities that use their leverage to transfer liability by making "onerous insurance requirements+that cannot be met by coverages typically available in the admitted marketplace," the paper says.

For example, a contract might require that the certificate requester be named as an additional insured or provided with a type of coverage that the insurer cannot or will not provide, Mr. Wilson said.

"There is often a disconnect between what certificate holders include in the indemnity provisions of contracts and what insureds can get or what their insurers are willing to provide," said Lee Roth, vp-business development for Hemet, Calif.-based Jenquest Inc., doing business as Insurance Data Services. IDS will process more than 3 million insurance documents, including certificates of insurance, for 200 clients this year, he said.

"Refusing to do so, agents are often faced with the claims from the insured or certificate requester that they know of agents who can or will provide such certificates," Mr. Wilson wrote. "Failure to do the same could mean the loss of an account for the agency. These unreasonable requests too often lead to the issuance of fraudulent certificates by insureds or agents," he said.

Risk managers for contractors sometimes try to alter existing certificate of insurance forms to meet their needs, Mr. Gibson said. "They try to turn the certificate into a contract rather than an indication of coverage," he said.

The second problem is certificate fraud by agents and insureds.

Agents' errors and omissions claims have increased 28% in the past three years, according to the white paper, which is based on data from the IIABA's own E&O insurance program.

About 21% of certificate E&O claims involving agents are related to "misrepresenting coverage on the certificate that doesn't actually exist," Mr. Wilson said. Such misrepresentation is often done "so an insured subcontractor can get a construction job or get paid for one," he added.

A more common error—in 36% of certificate E&O claims during the three-year-period—has been failure to add or improperly identify additional insureds.

In some cases, insureds make use of increasingly sophisticated word processing capabilities to produce fraudulent documents that look real, Mr. Roth said. "Now, those who have untoward intentions have more tools at their disposal," he said.

State action

A number of states have taken legislative or regulatory action to address some of the problems, Mr. Wilson said. For example, Alabama requires that insurers file any certificate that is not a standard form used by the Assn. for Cooperative Operations Research & Development in Pearl River, N.Y., or by the Insurance Services Office Inc. in Jersey City, N.J.

The vast majority of the IIABA's 25,000 member agencies obtain their E&O liability coverage through the association's program, which is marketed through its state affiliates. The association, which handles the program's marketing and loss control, provided data about percentage changes, but declined to provide claim numbers.

The third significant problem, according to the IIABA white paper, is insurers' unwillingness to provide notice of cancellation to certificate holders, despite language in some certificates that state the companies "will endeavor to" provide such notice.

Some mortgage lenders, including the Federal National Mortgage Assn., are so concerned about the latest version of ACORD forms—primarily forms 27 and 28—that they have refused to accept them, according to a Mortgage Bankers Assn. spokeswoman.

Lenders need timely and accurate insurance policy information to protect their and investors' interests, she said. The latest version of each of those forms contains the "endeavor to" wording rather than clearer language that was used as recently as 2003, which obligated the insurer to contact the certificate holder, which the lenders prefer.

A step too far

Essentially, "lenders want the (certificate) form to act as a substitute for the policy and summarize the terms and conditions of the contract," said Ken Stoller, senior counsel with the Washington-based American Insurance Assn. "The idea of imposing obligations on the insurers is really going a step too far," said Mr. Stoller, who noted it is the policyholder's responsibility to show the policy to the lender.

Standard insurance policy wording expressly requires that lenders be notified if a policyholder/buyer's coverage is no longer in force and that policy-stated requirement supersedes any wording in a certificate of insurance, several sources said.

Lenders, however, note that insurance policies are sometimes not available in a timely way for deals to close efficiently, the MBA spokeswoman said. In addition, policy wording is often complex and not as easy to interpret as a certificate.

After hosting a well-attended conference call last month, ACORD is establishing a working group to discuss the issue in detail. "We are committed to trying to resolve the conflict," an ACORD spokesman said. IF

Editor's Note: An executive summary of the white paper is available free to all online at www.iiaba.net/vu. The entire paper is free to IIABA members and paid Virtual University subscriber. The fee for others is $75. Also, an online supplement discussing several court cases is available to association members and VU subscribers.