To paraphrase Einstein, an insurance article should be as short as possible, but no shorter. I try to limit most of my blog posts to only a few hundred words in order to minimize the reader’s investment of time and, perhaps more important, to make it more likely that someone will read an article that will benefit them. THIS blog post is a rare exception in that it is longer than most by about 1,500 words. However, I cannot overly stress the importance of the information in this article and why it should be read by everyone involved in any way with certificates of insurance.
I’ve been preaching to agents and insurers for years that adding verbiage to a certificate of insurance is dangerous. There is an existing body of case law where such entries have triggered nonexistent coverage, often based on legal premises such as detrimental reliance (aka, promissory estoppel). These warnings were recently reinforced by an important decision from the Washington Supreme Court, T-Mobile USA v. Selective Ins. Co. of America, No. 96500, 2019 WL 5076647 (Wash. Oct. 10, 2019).
I first wrote about this court case last November and promised to update it when a decision was reached:
The most concise explanation of this decision I’ve seen is from the Merlin Law Group (whose blog post prompted my original article on this linked above) can be found here:
The article also links to the actual court case which you can access directly by CLICKING HERE.
I STRONGLY encourage you to read the article and the court case for the details. Below is my very brief recap and what I believe are the learning points of this case.
In a nutshell, the Selective agent indicated in the Description of Operations field on an ACORD 25 certificate of liability insurance that T-Mobile USA was an additional insured when, in fact, such status was not actually provided by the policy. When T-Mobile USA was sued and coverage was denied by Selective, litigation ensued.
When the federal Ninth Circuit heard this case, it ruled that Selective was bound by the apparent authority of its agent and the agent’s assertion on the certificate of insurance that T-Mobile USA was an additional insured. However, this conflicted with disclaimers on the certificate. So, the court requested certification from the Washington Supreme Court on whether, under Washington state law, an insurer is bound by representations made by its authorized agent in a certificate of insurance with respect to a party’s status as an additional insured under a policy issued by the insurer when the certificate includes language disclaiming its authority and ability to expand coverage.
An Amicus brief had been filed by the American Property and Casualty Insurance Association arguing that holding Selective to the representation of its agent would conflict with public policy, effectively permitting the certificate of insurance to supplant the terms of the policy. According to the brief:
“If fundamental contract certainty can be so easily undermined, individual issuers will presumably be forced to consider declining to authorize the use of any [certificates of insurance], which would represent an unfortunate—and unnecessary—end to the use of a tool that many stakeholders find useful when appropriately limited to its intended use as an ‘information-only’ communication that clearly explains that status.”
This Washington Supreme Court disagreed:
“The public policy of the State of Washington actually compels the opposite conclusion. Insurance companies act through, and are bound by, the representations of their agents made with actual or apparent authority. Enforcing those authorized representations has a modest aim: it provides the principal with an additional incentive to ensure that the agent’s representations—made in person, on the phone, or in writing—are true.
“Even though American Property and Casualty Insurance Association frames its argument in terms of certificates of insurance, the argument is actually an attack on the rule that an insurance company is bound by the acts and representations of its agent. But this court adopted that rule in 1933 because it was good public policy then, and we hold that it remains good policy now.”
In other words, the Washington Supreme Court answered the Ninth Circuit’s certified question by concluding that “an insurance company’s agent who makes an authoritative representation binds the insurance company, even when the specific representation is transmitted via a certificate of insurance and accompanied by general disclaimers.”
The court effectively ruled that pre-printed boilerplate disclaimers in a certificate of insurance are overridden by the specific verbiage entered on a certificate of insurance by the agent:
“A basic rule of textual interpretation is that the specific prevails over the general….We follow this rule when we interpret statutes and contracts….and for that reason, we follow this rule when we interpret certificates of insurance….
“Here, the preprinted disclaimers are general in nature. They purport to disclaim virtually every bit of information provided by the certificate. By contrast, the additional insured statement that the agent wrote in specifically refers to certain areas of policy coverage and makes a discrete representation that ‘T-Mobile USA Inc., its Subsidiaries[,] and Affiliates’ ‘is included as an additional insured.’….This specific written-in additional insured statement thus prevails over the preprinted general disclaimers.
“That conclusion respects the specific purpose for which the certificate was issued: to inform T-Mobile USA, its subsidiaries, and its affiliates that they are additional insureds under the policy. Giving effect to the disclaimers, by contrast, would render issuance of the certificate—and the specific representation within it—pointless. Contrary to Selective’s argument, the certificate would have no informational value at all. All it would do is ‘”set a trap”‘ for the certificate holder.”
If you review the actual decision linked above, you’ll find that there was a strongly worded dissent from one of the justices that supported the application of the certificate disclaimers to confirm that the certificate was an informational document, not a warranty of any kind. In addition, by effectively allowing the certificate to modify the insurance contract, the court was allowing the certificate to serve as an unfiled insurance policy form, possibly in violation of insurance statutes. It is not known if the policy form had language similar to the ISO IL 00 17 Common Policy Conditions form:
“This policy contains all the agreements between you and us concerning the insurance afforded…This policy’s terms can be amended or waived only by endorsement issued by us and made a part of the policy.”
What’s interesting is that there was nothing in the decision that appeared to consider other applicable state statutes that might govern. For example, WAC 284-30-355 says:
(7)(b) Notwithstanding any requirement, term, or condition of any contract, the insurance coverage provided by the referenced policy of insurance is subject to all the terms, exclusions, and conditions of the policy. A certificate of insurance does not confer new or additional rights beyond what the referenced policy of insurance provides. [Emphasis added]
Should this statute, in its entirety, not govern or at least be a part of this decision?
So, what are the lessons learned from this decision?
Lesson #1: Minimal verbiage should be provided on a certificate of insurance by qualified individuals
When asked in the past, “What statements can I put on a certificate of insurance?” my response has usually been that, from a business decision standpoint, you can put anything you want that isn’t patently illegal or a misrepresentation of the policy terms. I say that being well aware of the pressure often put on agents to add very specific, verbatim language on a certificate of insurance.
The problem is, that language is often ambiguous, not based on any policy language, and can be misinterpreted. In addition, mistakes happen. For these reasons, it is good E&O practice to limit any extraneous information on a certificate of insurance and, when at all possible, only include language taken verbatim from the policy.
Needless to say, certificates should only be issued by qualified, trained staff and QC audits should be conducted regularly. And, rather than adding commentary on the certificate, it is far better to simply refer the certificate holder and/or additional insured to the actual policy forms by including them in the transmittal….
Lesson #2: Policy forms (particularly additional insured endorsements) should be provided to certificate holders and AIs
Courts have held that insureds seeking coverage that doesn’t exist have an obligation to read the policy forms in their possession. For example, Admiral Insurance Company v. Cresent Hills Apartments, 328 F.3d 1310 (U.S. Ct. App. 11 Cir. 2003), citing Brooks Brown Ins. Agency, Inc. v. Harden, 236 Ga.App. 781, 513 S.E.2d 755 (1999) where the court opined:
“…an insured has a duty to take certain steps for its own protection such as reading their policies, certificates of insurance or any cancellation notices in their possession.”
Another case is Alabama Electric Cooperative, Inc., et al. v. Bailey’s Construction Company, Inc., Sup. Ct. (2006) where the court observed:
“The Court concludes that [the client], claiming to be an additional ‘insured’ under [the policy], should be held to the same obligation as a named insured to review a policy of insurance on which it seeks to rely, and its reliance solely on the agent’s certificate of insurance is not reasonable under the circumstances….”
“Where an entity requires another to procure insurance naming it an additional insured, that party should not rely on a mere certificate of insurance, but should insist on a copy of the policy.” – Couch on Insurance (3d ed. 1997)
Lesson #3: Agents should send copies of certificates of insurance to insurers AND the insurers should review them
It is no secret that virtually all insurers tell their agency forces to NOT copy them on certificates of insurance. I have always told agents, as have their E&O carriers, that they should continue to send certificates to insurers regardless of such mandates. The present case is one of many examples of why this is a sound E&O practice. There are other cases where insurers have used the excuse that they never saw the offending certificate of insurance.
For example, in Marlin v. Wetzel County Board of Education, 569 S.E.2d 462 (West Virginia Ct. App., 2002), the insurer denied any liability for wrongful certificate information:
“[T]he insurance company asserted that it never received the certificate of insurance or any other documents suggesting the insurance policies needed to be amended.”
“[T]he insurer argues that it had no knowledge of the certificate’s existence….”
In another case, Erie Insurance Group v. National Grange Mutual Ins. Co. (NY Sup. Ct., June 2009), additional insured status was contingent upon the issuance of a certificate of insurance:
“Each of the following is added as an Additional Insured…[a]ny general contractor, subcontractor or owner for whom you are required to add as an additional insured on this policy under a written construction contract or agreement where a certificate of insurance showing that person or organization as an additional insured has been issued and received by [NGM] prior to the time of loss.”
AI status was denied because the carrier did not “receive” the certificate. Such requirements are not uncommon in the construction industry, especially in the E&S marketplace for automatic endorsements that condition coverage in the case of oral contracts on certificate issuance.
Notice to Insurers: PLEASE read the following paragraph….
I have suggested to insurers for years that the failure to review the certificates of insurance issued by their agents, at least on a QC basis, is a foolish time and expense saver. Insurers should WANT to know what their agents are representing to insureds and other parties that may be unwise, misleading, misrepresentative, or even fraudulent. Otherwise, as this case demonstrates, the carrier may end up being held liable for its agents’ actions. Insurers have a vested self-interest and, arguably, a moral and ethical obligation to work closely with their agency partners to make sure they are properly educated on the issuance of certificates of insurance and follow reasonable QC procedures of the carrier that are based on sound business principles that are fair to insureds and other parties in business relationships.
December 5, 2019 Webinar:
“Certificates of Insurance…Or How I Got a Job in the Prison Laundry”
Talk about good timing. On December 5, I’ll be doing a two-hour webinar on certificates of insurance and related contractual liability and additional insured issues for the Boston Insurance Library. During this webinar, I’ll discuss the Washington Supreme Court case along with many other relevant topics.
The cost is only $65 ($45 for library members) and it’s a great cause. If you’re in Massachusetts or New Hampshire, the program is approved for 2 CE credits.
For more information and/or to register, CLICK HERE.