The Problem With Certificates

Certificates of insurance can create problems for insurance agents, especially in the areas of commercial property and the construction industry. The potential for disputes to arise is so great that the Texas Department of Insurance recently felt the need to remind agents and insurers alike to take care not to misrepresent the character of insurance coverage to their commercial insurance clients.

“Misrepresentation of insurance policies by failing to state a necessary material fact, or by making a statement in a manner that would mislead a reasonably prudent person to a false conclusion of a material fact” is prohibited, TDI said.

While Texas felt obliged to remind agents and brokers of their duty to accurately characterize insurance coverage to their clients, the message is one that conveys easily to insurance professionals across all states.

Certificates of insurance are summary documents usually issued by an agent on behalf of an insurer that says a policy has been issued to an insured for a general type of risk, according to Brian S. Martin, a partner in the Insurance Litigation and Coverage Practice in the Houston office of the law firm of Thompson Coe Cousins & Irons LLP. Certificates are often issued to an interested third party that has need of evidence that an insurance policy is in place.

TDI warned that insurers and agents must take care not to include language in a certificate that does not “accurately reflect what actually exists for the benefit of the policyholder or beneficiary.” In other words, don’t say or even imply that coverage exists when it doesn’t.

Seems like a no-brainer, right? But apparently it’s not that simple – as anyone who’s ever dealt with a lawyer or gone to court knows, language can be interpreted in a variety of ways. A Texas case that Martin discussed in a recent edition of Insurance Journal (“Do Certificates of Insurance Matter?” IJ South Central, Nov. 15, 2010) exemplifies the danger that certificates can pose for agents and brokers.

Despite previous Texas Supreme Court decisions limiting the use of certificates to prove or establish coverage, a state appeals court recently accepted a plaintiff’s argument that the “All Risk” language in a certificate of insurance “was a partial disclosure that conveyed a false impression and was therefore problematic,” according to Martin. The appeals court also found evidence to support a jury finding that the broker in the case “had made a negligent misrepresentation in using the term ‘All Risk’ [in the certificate when the policy] did not really cover all possible risks, and therefore was confusing.”

While the state Supreme Court may view the case differently, the appeals court decision reveals the dangerous ground that agents tread when issuing certificates of insurance.

“An insurer or its agent should not issue or sign forms that create rights and obligations outside the insurance contract,” TDI said. The department’s message may state the obvious, but it never hurts for all agents be reminded to take special care in crafting certificates of insurance for their customers.

Topics Texas Agencies