E&O Risk Management: Meeting the Challenge of Change Certificates of Insurance

INTRODUCTION While there are a number of issues that can create E&O claims, one of the most common errors made involves agencies using the certificate of insurance as a way to add additional insureds without formally contacting the carrier to add them by endorsement E&O Issues with Certificates of Insurance

CERTIFICATE What is a certificate of insurance? Informational snapshot only It is for general informational purposes only and confers no rights It is subject to all of the terms and conditions of the various policies shown E&O Issues with Certificates of Insurance

CERTIFICATE What isn’t a certificate of insurance? It does not: extend any contractual rights to the holder not provided by the policy represent compliance with any contracts entered into by the insured with others amend, extend or alter coverages or terms afforded by the policy E&O Issues with Certificates of Insurance

E&O EXPOSURE Why the increase in E&O exposure: Increased demand from third parties for certificates and additional insured status  Increased complexity of certificate and related documentation (agent affidavits, compliance checklists, etc.) requests  Increased frequency leads to routine which leads to complacency in vigilantly reviewing requests E&O Issues with Certificates of Insurance

E&O EXPOSURE Why the increase in E&O exposure: Lack of agency staff qualifications for more complex requests, particularly requests for specific verbiage on certificates  Increased pressure from insureds and third parties to issue misrepresentative certificates  Improved litigation success focused on claims of fraud and detrimental reliance E&O Issues with Certificates of Insurance

Certificates of Insurance Should You Be Concerned? 2009 E&O Data 42% AI missing/wrong 24% misrepresentation 17% nonexistent coverages Corroboration City of Atlanta survey Agency consultant review Florida agency study AI endorsement not added $180,000 Blanket AI endorsement $445,000 4,000 bogus certificates $10,290,000 $150 MILLION claim? Average COI claim is $50,000 City of Atlanta survey 20% of COIs indicated policies that did not exist 50% of COIs lacked AI endorsements Consultant file review in one agency 42% of COIs showed AI endorsements that were never ordered Florida agency 11-month study 90% error ratio 40% of COIs with errors significant enough to pose an E&O E&O Issues with Certificates of Insurance

Certificates of Insurance Always Use ACORD Forms ACORD’s licensing agreement requires new form editions to be used no later than one year following publication This may require upgrading agency management systems Never issue “blank” certificates that do not show certificate holders E&O Issues with Certificates of Insurance

Certificates of Insurance Requests for Specific Language Contractual insurance requirements Description of Operations verbiage Review ACORD FIG explanation Do not “quote wording from a contract” Agent affidavits or opinion letters Compliance checklists Do not paraphrase or summarize policy terms The ACORD Forms Instruction Guide (FIG) entry for “Description of Operations” says nothing about adding comments regarding AIs, subrogation waivers, cancellation notice, etc.: Description of Operations / Locations /Vehicles As used here, records information necessary to identify the operations, locations and vehicles for which the certificate was issued. See attached Pages 6-7 from seminar manual for language examples E&O Issues with Certificates of Insurance

Certificates of Insurance Cancellation, et al. COIs often address CGL, auto, WC, and other policies that might have varied termination and change conditions ACORD forms now refer the holder to the policy forms for cancellation, nonrenewal and material change terms E&O Issues with Certificates of Insurance

Certificates of Insurance Online Certificate Systems Often marketed to third parties based on funding by insurance agents who pay entry and access fees Agent may be forced to use system or lose customer Agency has no control over entered information No permanent copy for agency management system May result in policy misrepresentation in violation of the law May violate agency/company agreement DOO field could be entered by the insured on one system AI information could be added by certificate holder on another system E&O Issues with Certificates of Insurance

Certificates of Insurance Reviewing Contracts Pros and cons E&O claim example Onerous request Sample disclaimer…see manual Page 10 Where did you go to law school? E&O Claim Example: Insured carried $10M in CGL limits which was always enough to meet every contractual requirement encountered over several years. However, one contract required $20M and the agent overlooked this. Two weeks into the job, the insured had to double his limits at a cost of $8,000 which would come out of his profit on the job since his bid had not included this cost. He filed an E&O claim against the agency. Onerous Request: A Michigan agent refused to review a contract and issue an agent opinion letter that his customer’s insurance conformed to the contact. The certificate holder hired a consultant to do this. The consultant then sent his bill to the AGENT to pay. The agent said he’d pay it after getting a copy of the consultant’s Michigan insurance counselor license. E&O Issues with Certificates of Insurance

Certificates of Insurance Contract vs. Policy Limits Insured has a $5M policy limit and the contract only requires $1M, so he only wants the certificate to show $1M so he doesn’t reveal his full limit ACORD FIG: “Enter limits corresponding to those found on the policy declarations page.” It is likely illegal to misrepresent policy provisions Some AI endorsements only pay the lesser of the two, so it would be OK to show that on the COI E&O Issues with Certificates of Insurance

Certificates of Insurance Sending COIs to Insurers Send them. Next question? Marlin v. Wetzel (WV Sup. Ct., 2002) Erie v. NGM (NY trial court, 2009 “Our internal procedures and our legal counsel require that a copy of all certificates be sent to our carriers.” Some AI endorsements are triggered by the receipt of the certificate by the carrier. E&O Issues with Certificates of Insurance

Certificates of Insurance Additional Insured Issues MANY proprietary AI endorsements are significantly inferior to ISO forms (ongoing only, vicarious only, excess coverage, etc.) “Primary and noncontributory” (new CG 20 01 04 13) CA 20 48 is not a true AI endorsement E&O Issues with Certificates of Insurance

Certificates of Insurance Final Comments Specific Steps to Decrease Exposure Solutions for Agencies Education Procedures Job restructuring “Service, not servitude” Review Pages 13-14 from the manual E&O Issues with Certificates of Insurance