Author: VU Faculty

THIS MAY BE THE MOST IMPORTANT ARTICLE YOU READ THIS YEAR. If you insure contractors or others who must enter into agreements specifying insurance coverages and certificate language, you could be opening yourself up to lawsuits or, believe it or not, even worse. Learn how practices that many agents are involved in could be the ruin of their careers or even their agencies.

Here's the scenario: Your insured is bidding on a construction contract with a large, national builder. The contract includes an insurance addendum that requires that certain coverages, limits and terms be in place. Compliance would necessitate adding the builder as an additional insured, restructuring the coverages, and even modifying the coverage forms themselves (or implying that the forms have been modified). The builder also wants major revisions to the certificate(s) of insurance.

Of course, your insured's current carrier refuses to do any of this. What do you do? Your insured insists that, without these concessions, he will not get the job. You know that if you don't assist your insured in complying, you may lose the account to an agent who is willing or (allegedly) able to meet the builder's demands...sometimes, remarkably, with the same carrier who refused your request. Before we look at some answers, let's go back to the start.

Here's a laundry list of some of the requirements in the construction contract insurance addendum (BTW...these are real), along with some commentary:

• The following additional insured endorsements must be added to the contractor's CG 00 01 07 98 policy (though it isn't clear which): CG 20 26 11 85, or CG 20 10 11 85 or CG 20 10 10 93 (but only if modified to delete the word "ongoing" and insert the sentence "Operations include ongoing and completed operations").
  
  CG 20 26 11 85 - Additional Insured – Designated Person or Organization says, "WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule as an insured but only with respect to liability arising out of your operations or premises owned by or rented to you."
  
  CG 20 10 11 85 - Additional Insured – Owners, Lessees or Contractors – (Form B) says, "WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of 'your work' for that insured by or for you."
  
  CG 20 10 10 93 - Additional Insured – Owners, Lessees or Contractors (Form B) says, "WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured."
  
  Note from the contract wording that they want the word "ongoing" deleted and replaced to ensure that coverage is provided for both ongoing and completed operations. This requires that a 1985 endorsement be modified which quite possibly cannot be done by the carrier unless they don't mind violating insurance laws. In addition, the wording of the referenced form was deliberately modified by ISO to eliminate P/CO coverage for additional insureds to begin with.
  
  Keep in mind that many insurers, particularly those that closely follow ISO filing schedules, no longer have the requested 17-year-old  endorsements available. The drafters of the construction contract cite the older endorsements either because they don't know newer editions exist, don't want to modify their contract every time the forms change, or because they prefer the language of the older forms.
  
  Sometimes endorsements are revised because of revisions in the primary policy. Using an older endorsement with a newer primary policy could create havoc in coverage. For example, revising an old AI endorsement to add completed operations coverage will create a problem if the current primary policy form does not include that coverage for the AI (more on this below). Even more important, if the carrier has adopted a new endorsement, chances are they may be legally unable to use an older one. It is always best if all parties work with the latest forms available, some of which may be more appropriate for current exposures and arrangements (e.g., the CG 20 37 10 01 and CG 31 15 10 01 cited below).

• The additional insureds are to include the builder entities (a partnership and corporation), the site owner, and all of their respective officers, directors, partners, members, and employees. The AI endorsements are designed to pick up incidental, largely vicarious, liability exposures of specific persons or organizations? This contract provision basically expands the contractor's CGL Who Is An Insured section to include almost everyone affiliated with the builder and/or owner, including office workers at the corporate headquarters. As an agent, do you realistically expect your carriers to assume that kind of exposure?

• The contract effectively requires that the contractor's CGL policy continue in force to cover the AIs for BI and PD that occurs after all work on the site has been completed. There is no specific termination date and, at the builder's request, the contractor must provide certified copies of all subsequent policies for at least five (5) years. This would preclude any future designated premises exclusions. If the contractor goes out of business, this would appear to necessitate discontinued operations coverage. In addition, as discussed below, it is even questionable whether the AI has P/CO coverage...the modified AI endorsement implies that it exists, but the current CGL policy may not grant that coverage to AIs.
  
  At issue is whether this is reasonable and, as the agent, are you willing to provide this service indefinitely (or for at least five years) for free? Are you willing to remain vigilant in monitoring continuing coverages for perhaps dozens or hundreds of projects for a one-time commission? Do the rating plans in place for your carriers contemplate this broader, longer term exposure? Is your insured willing to deplete his aggregate limit several years down the road due to a claim against one of these AIs?

• The contract requires thirty (30) days notice by certified mail for cancellation, nonrenewal, and modification or reduction in coverage. It also mandates that the Certificate of Insurance (COI) be revised to delete the wording "endeavor to" and "but failure to mail such notice shall impose no obligation or liability of any kind upon the company, its agents or representatives" from the cancellation portion of the COI.
  
  The contract, to the fullest extent permitted by law, also calls for the deletion of anything in the Certificate of Insurance that would imply that it does not confer rights to the insurance. This probably refers to the language on the ACORD 25-S (07/97) that says, "This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below." There is significant case law to support the position that the certificate holder has no rights, under the certificate, to the insurance contract. Clearly, the builder wants to attempt to create such rights...a difficult task given that there is no consideration to the carrier for doing so.
  
  In addition, the back of the form says, "The Certificate of Insurance on the reverse side of this form does not constitute a contract between the Issuing Insurer(s), authorized representative or producer, and the certificate holder, not does it affirmatively or negatively amend, extend or alter the coverage afforded by the policies listed thereon." In other words, the attempt here is to create enforceable legal obligations for both the insurer and agent.
  
  The back of the form also says, "If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed. A statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s).

• The contract clarifies that coverage is not limited to vicarious liability and it prohibits any endorsement limiting coverage for ANY negligent acts, errors or omissions of the builder. Although it may or may not be the intent, this would imply that coverage goes beyond that of the CGL which does not cover, in a strict sense, "errors or omissions." It may also imply that no exclusion apply, as ludicrous as that may sound.

• The contract forbids exclusionary language for things such as soil subsidence, earth movement, pollution, mold or fungus, EIFS, etc. How many of you represent carriers whose CGL policies cover pollution? Increasingly, most policies now also exclude or limit claims arising out of fungi and EIFS. This one provision alone makes it virtually impossible for the contractor to comply with the contract.

• If insurable by law, the policy must cover punitive damages, fines or penalties. CGL policies don't cover fines or penalties...in fact, it's likely that your E&O policy doesn't cover them either. :-(

• The contractor must require (and provide proof of upon request) each subcontractor to comply with the insurance requirements of the contract and the sub must sign a holdharmless/indemnity agreement specified by the contract, naming the builder, owner, officers, etc. (not the contractor) as beneficiaries. A complete subrogation waiver is also required. Unless prohibited by the policy or law, the contract requires an assignment of the policy to AIs if the contractor is out of business or cannot be located.

• The contract makes the contractor's policy primary, which isn't unusual for AI's...the Other Insurance condition of the 1998 CGL states that it is excess over "Any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement." Note, with regard to the discussion above, that this applies only to the Named Insured, not all other additional insureds specified by the construction contract. Also note that this applies to "operations"...it does not mention completed operations as required by the contract. This is the danger that arises when trying to apply nebulous contract provisions across varying editions of policy forms and endorsements.
  
  What is particularly disturbing is that coverage is required to be extended to the builder on a primary basis for their own negligence, not just the contractor's negligence. In fact, it makes the contractor's insurance primary for ALL acts of the builder. So, the contract does more than provide primary coverage for the builder if held liable for the contractor's actions...it attempts to provide direct liability coverage for the builder even if the contractor isn't liable.

This agreement is a good example of a risk manager and/or attorney gone amok. The attempt here is essentially remove all insurable risk from the builder and place it on the shoulders of the contractors and subcontractors. The builder can, or can at least try to, do this because of size and market clout. By passing along significant costs to contractors and the insurance industry, they keep their costs lower and make themselves even more competitive relative to other builders who don't require such onerous contracts.

So, what can you, as the agent, do when faced with these types of insurance requirements imposed on your insureds?

First, NEVER, EVER modify an ACORD certificate or policy form. The odds are real, REAL good that you have no authority to do so in your agency/company agreement and/or doing so is illegal in your state. In an "Ask an Expert" question we received recently, the agent advised:

"We are receiving more and more requests for certificates that require the following language: '__________ is an additional insured on the general liability and the automobile insurance policies and Seller's insurance is primary and not contributory with any insurance maintained by Company." [Note: In the situation calling for AI status, there was not even an auto endorsement to accomplish this, so the Company was asking that the certificate show a contract component that didn't even exist.]

The ACORD Forms Instruction Guide says, "Agents or brokers should not change any provisions on this form without prior consent of the issuing company. The ACORD Certificate should be issued only in compliance with company instructions. ACORD recommends that the Certificate NOT be used in the following situations: to waive rights; to quote wording from a contract; to attach to an endorsement; to quote any wording which amends a policy unless the policy itself has been amended."

In the Commercial Package Policy's Common Policy Conditions (IL 00 17 11 98). Under Item B. Changes, the contract says, "This policy's terms can be amended or waived only by endorsement issued by us and made a part of the policy." In other words, only the insurer has the authority to amend policy coverages. According to the insurance contract, any coverage changes, ACORD form revisions, or non-ACORD forms MUST be issued by the insurer, not the agency.

In addition, some states effectively make it illegal for an agent to change the policy by certificate revision. To illustrate, Kentucky statute KRS 304.14-120 says, "Prior to its use, each insurer shall file with the commissioner the form of certificate or memorandum of insurance which will be used by such company." According to the ACORD Forms Instruction Guide, Kentucky, Minnesota, North Carolina, and Wisconsin require the filing of COI's. A revised certificate must be refiled before it can be used.

June 7, 1995 and January 27, 1998 circulars from the NY Superintendent of Insurance advised agents that "...any document that amends, expands or otherwise alters the terms of the applicable insurance policy constitutes a policy form which must be filed.... Licensed producers are advised that they may not add terms or clauses to a certificate of insurance which alter, expand or otherwise modify the terms of the actual policy unless authorized by the insurer which has filed an appropriate endorsement...."

Florida Department of Insurance Bulletin #94-014, dated June 17, 1994, states in part: “Many cities, counties and corporate insureds have preprinted or modified Certificates of Insurance that are not the same as those normally used by insurers. Some of those certificates have been modified to incorporate 'hold harmless' agreements or other clauses that differ from the language in the policy. Certificates of Insurance are merely evidence of insurance in lieu of an actual copy of the insurance policy. They are to be used to show evidence of insurance. They are not to be used to attempt to modify the terms of the policy itself. No insurer or agent should issue or sign a Certificate of Insurance that contains terms or conditions that differ from those in the underlying policy.” (Note: the Florida DOI recently issued a memorandum OIR-03-003M which reiterates the improper practice of modifying certificates of insurance.)

Recently, an agent asked ACORD if he could make changes to the certificate as required by a national hotel chain. ACORD advised that modifying the form would be a violation of copyright law and can only be done within the licensing agreement ACORD has with many carriers. (What is interesting is that the motel chain supplied the certificate they wanted signed. The certificate WAS the ACORD form, with certain wording lined through and the ACORD logo missing. Copyright violation?) You should check with your local state association or regulator to learn what laws may apply in your state.

If possible, offer alternative solutions to outdated forms specified in these contracts. In the discussion above about primary vs. excess coverage, the danger was shown in trying to meet contractual obligations with amendments to policy forms and endorsements spanning 17 years or more. Whenever possible, current policy forms should be used. In ISO's 2001 CGL program, completed operations coverage for AIs is once again available using a currently filed endorsement that is designed to work with the current CGL policy form edition. They also now have a blanket additional insured endorsement, and even a new Construction Project Management Protective liability Coverage form (CG 31 15 10 01). If you aren't up on these changes, contact your local state association to see what CG​L seminars may be scheduled.

Don't blindly do what the contract asks for. As one risk management person put it, his job is to ask for the moon, then let the agent or company tell him what they can't or won't do. As an agent, you may be banking on a loss never happening that would go uncovered. Or you may think that's why you have E&O insurance. If the latter, read your policy...there are some things your E&O policy doesn't cover, including, most likely, contractual liability, fraud, misrepresentation, etc.

As an agent, you are not a party to the contract...unless express permission has been granted under your company agreement (and does not otherwise violate laws or regulations), you have no authority to change the insurance contract or issue a certificate that indicates terms and conditions not provided for in the policy. If you do, then you subject yourself to suits from your carriers, insureds or third parties, not to mention the possibility of losing your license(s).

For more information about certificates, check out this article: "Following Up on Certificates of Insurance."