In 2010, the late great Don Malecki wrote an article in his Rough Notes magazine column called Worthless Pieces of Paper which I’m considering Part 1 of this topic. I’d encourage you to click the link and read Don’s article before continuing, but at least do it after you read this post. Over the years, I’ve cited this and other examples of insurance policies that provide largely illusory coverage in my seminar/webinar entitled, “The Additional Insured Illusion…And Other Feats of Contractual Risk Transfer Magic Even David Copperfield Couldn’t Pull Off.”

This, as Don explains, is one of the primary problems with certificates of insurance…many of them are worthless pieces of paper if your goal in requesting them is to determine if a business partner’s insurance program meets your contract requirements. I’ll give you one other example that happened to me personally within days of Don’s article being published….

In 2010, my home was hit by a tornado. Fortunately, the damage to the house itself was only a few thousand dollars, but we lost 19 trees, most of them 40-80 ft. cedar trees. As a result, I had to hire a tree service company to remove the ones down or damaged, including a couple overhanding my neighbor’s property. I got 4-5 bids, including one from a company that had only been in business a few months. Of course, I asked each for proof of insurance.

The new company owner was so proud of his insurance package, that he gave me portfolio in a clear plastic cover that included a certificate of insurance, declarations page, and some supporting documentation. The first thing that caught my eye was that his CGL premium was $707, something that immediately told me there was a problem. The certificate of insurance said he had a 2004 ISO CGL policy, a fine liability insurance contract. However, what the certificate did NOT show was what was in the supporting documents, such as the 42 endorsements attached to the policy.

One of the endorsements limited coverage only to activities for which he was coded and rated. He was coded as “tree trimming and pruning.” My job, again, involved taking down 80 ft. trees, cutting them up, grinding the stumps, etc., not something I’d consider as “trimming and pruning,” but apparently the definition is broad enough to include what they’re doing in that code. However, there was another endorsement that excluded “ongoing operations” and “your work” (aka, completed operations). In other words, he had absolutely no coverage for his business activities, something he was totally oblivious to. This explained the $707 premium.

I don’t know about you, but to me, issuing this policy package to someone knowing what they actually do should constitute insurance fraud on the part of the broker and carrier. Not only does the insured have no real coverage, but the general public is being exposed to great risk by someone with no insurance and minimal assets. It was an E&S account (sometimes you can see the name of a carrier and KNOW there are significant exclusions in such policies) and I’m sure it was likely the only quote he could get and/or afford. He was thrilled and proud to have it, though “it” amounted to nothing.

But the certificate of insurance probably got him jobs even where proof of insurance was required because the certificate showed he had CGL coverage. It just didn’t cover anything.

Yesterday I read a LinkedIn post about how tracking certificates can reduce your risk and felt compelled to respond to it. Certificates have some value but they certainly do not guarantee that a contractor or business partner is in compliance with the insurance requirements of a contract. There is only one way to determine this and that’s to review the actual policy forms and endorsements. There is no other way.

P.S.   If you’ve never scrolled all the way down a page on this web site, you’ve missed the fact that it’s dedicated to the memory and legacy of Don Malecki. Don was a mentor to many hundreds of industry professionals and an inspiration to thousands. He was the consummate insurance professional and, on a personal level, was simply a great guy who loved to debate insurance coverage and case law, play a little golf from time to time, and enjoy a fine merlot. I and many others miss him a lot.

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Bill Wilson

Founder at InsuranceCommentary.com
One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America. Reprint Request Information

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