Certificates of insurance have become a large burden on insurance agencies. They were once used as a tool for businesses to share information about their insurance programs. They now have become a leading source of errors and omissions claims against insurance agents. That was the case for a New Jersey agency and one of its construction clients.
The client, a waterproofing contractor, was sued over an injury to a worker at a job site in the New York City borough of Queens. The contractor had a commercial general liability insurance policy, obtained by its insurance agency. The agency, which was not an appointed agent of the insurer providing the coverage, issued a certificate of insurance to the contractor for the project. However, the CGL policy contained an endorsement excluding coverage for any work done in the five boroughs of New York City. Apparently, the certificate did not mention that. The insurer denied coverage for the injury in Queens.
The contractor sued the agency, the individual insurance producer, and the insurer in New York State court. The suit accused the agency and producer of misrepresenting the insurance coverage; breaching their contract with their client to obtain appropriate coverage; and negligence in failing to obtain appropriate coverage. It also claimed that the agency and producer were actually agents of the insurer. It argued that the insurer was liable for the acts of its agents, and it should be forced to cover the claim. The agency, producer and insurer all moved to have the case dismissed. The trial court refused, and the defendants appealed.
The appellate court dismissed the claims against the insurer, but not those against the agency and producer. First, the judges said that a New Jersey court should hear the negligent misrepresentation action. There was a significant difference between New York and New Jersey laws on that subject, and the agent and insured were both headquartered in New Jersey. Explaining their decision, the judges noted that the contractor “alleged that (the agency and producer) issued a certificate of liability insurance to (the contractor) which misrepresented that (the contractor) was covered for the work conducted in Queens under the policy … and that (the contractor) reasonably and justifiably relied on that certificate to its detriment.”
They also refused to dismiss the breach of contract claim. The contractor, they said, had made a credible allegation that it had a contract under which the agency was to obtain appropriate liability coverage every year. The deficient coverage the agency obtained may have violated that contract. The judges also said that the agency’s documentation, including the certificate and the policy itself, were not enough to have the contractor’s suit dismissed.
The appellate court’s opinion did not mention the amounts of the damages. However, the contractor was seeking defense and indemnity for a bodily injury claim on a construction site. The bill for settlement and legal costs was likely hundreds of thousands of dollars.
Agencies can avoid getting into this kind of mess by adopting a few procedures:
- Carefully review all new and renewal policies and compare them to the quotes the carriers provided. Question any discrepancies. It is not clear from the court’s opinion whether the agency was even aware of the New York City work exclusion.
- Have a standard procedure for issuing certificates of insurance. Enter only information that is relevant to the location or project. If one or more exclusions could apply to a project, attach copies of the endorsements to the certificate. The agent in this case may have avoided the lawsuit simply by attaching the New York City work exclusion endorsement to the certificate.
- Send policies to clients with cover letters encouraging them to read the policies. Invite them to contact the agency if they have questions about their coverage. Such a letter might have permitted the agency to successfully claim that the contractor was instructed to review the policy and failed to do so.
Certificates of insurance are an unfortunate fact of life, particularly for construction accounts. Agencies take risks whenever they issue them, but the procedures listed here can help them minimize those risks.