Insurance Law Journal

No early warning signs for Certificates of Insurance

By Harvey J. Lung

Property owners can shift the risk of loss or damage through several means, one of which is insurance. In addition to obtaining their own insurance, property owners are often protected under the insurance policy of their lessee or tenant. The property owner receives a certificate of insurance (“COI”) verifying that the lessee or tenant is indeed insured, and that the insurance is in effect. A recent change to the COI form could have significant adverse effect on the ability of property owners and property managers to ensure that the lessee’s or tenant’s insurance remains valid and effective.

Until recently, the standard COI form contained a provision requiring the insurance company to give notice of cancellation of the policy to any certificate holders. This notice requirement allows certificate holders to take action to protect their interests in the event of an intentional or inadvertent cancellation of the insurance policy for which the COI is issued. Most insurance companies have used the ACORD 25 form for this purpose.

In September 2009, ACORD revised the ACORD 25 form to omit the notice of cancellation provision to certificate holders. The reason for this change is that the insurance policies themselves contain no requirement for a notice of cancellation. ACORD 25 was criticized as offering a benefit to certificate holders that the insurance policy itself did not provide. As a result, the notice of cancellation provision in the standard COI was deleted.

In December 2010, the State of Hawaii issued a notice to its departments to begin accepting the new ACORD 25 forms that omit the notice of cancellation provision, effectively waiving such a requirement for existing and future contracts. Some Hawaii insurers began using the new ACORD 25 form in January 2011, and others are likely to follow suit.

What this means is that property owners/certificate holders, will no longer have the benefit of being notified by the insurer when a policyholder’s insurance is cancelled. Without such notification, insurance covering a lessee or tenant’s use of the property could be cancelled without recourse by the property owner. Moreover, notice of cancellation of an insurance policy has often been used by property owners and managers as a type of early warning system to signify a problem lessee or tenant. Failure to pay premiums leading to cancellation of insurance has tended to be an early indicator of financial difficulty or poor management on the part of the lessee or tenant.

Without the notice of cancellation feature in the standard COI, property owners and managers lose a key tool in monitoring the financial viability of their lessees and tenants.
Some insurers are responding to the change in the ACORD 25 form by writing a special endorsement which incorporates a notice of cancellation provision into the policy itself. Other insurers, however, have not done so. It is incumbent upon property owners and managers to check with their own insurance agents and review their lessee or tenants’ policies to determine whether such an endorsement exists.

For those insurers who are not offering endorsements that require the notice of cancellation, there appears to be no way to completely avoid the risk of a situation where a certificate holder is left holding a meaningless piece of paper. However, that risk can be reduced if the certificate holder is vigilant in making sure that the policyholder maintains any contractually or statutorily required insurance. Certificate holders may need to have someone on their staff regularly check with the insurer to confirm the continued viability of the policy. In addition, the forms of contracts with such parties should continue to require the policyholder to notify the certificate holder of any changes to the policyholder’s insurance. For example, the State of Hawaii is requiring all of its departments to contain the following clause in its contracts:

The Contractor will immediately provide written notice to the contracting department or agency should any of the insurance policies evidenced on its Certificate of Insurance form be cancelled, limited in scope, or not renewed upon expiration.

A similar provision should be inserted into contracts on behalf of clients/certificate holders where such clients/certificate holder is relying upon the availability and maintenance of insurance from third parties to cover risks that may arise from the use of the subject property. Such a provision would not guarantee that the policy holder will keep the policy in good standing, but the possibility of being in breach of contract could have somewhat of a deterrent effect in preventing the policy holder from abandoning the policy.

The deletion of the notice of cancellation requirement in the ACORD 25 form leaves property owner / certificate holders vulnerable to risks of loss and property damage that might otherwise be covered but for a lapse in insurance. Looking for insurers who offer the requirement of such notices of cancellation in the policy itself is one way to deal with the issue. Another is to beef up contracts and institute monitoring procedures to guard against policies that are cancelled.

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