State Laws and Certificates of Insurance

drawing of hand siging a contract with a purple pen
Image courtesy of [Paul Gilligan] / Getty Images.

Certificates of insurance may contain statements that violate state laws. Here is an example.

Example

Larry owns Lucky Landscaping, a landscaping company. Larry's firm has just been hired by Busy Builders, a general contractor, to do landscaping work at an office complex Busy is constructing. It is a last-minute arrangement. A landscaping company that Busy hired previously backed out of the project.

Construction on the complex has already begun.

Larry is eager to begin work. However, Busy Builders will not allow his employees onto the job site until Lucky has provided a certificate of liability insurance. The certificate must show that Lucky's general liability policy meets the stringent coverage requirements specified in the construction contract.

Larry takes a copy of the required coverages to Linda, his insurance agent. He explains that he needs a certificate immediately so his workers can get started on the project. Linda reviews the requirements and immediately spots some problems. The certificate requires:

  • Coverage for Busy Builders and its officers, directors and employees as additional insureds¬† Lucky's liability insurer will likely cover Busy Builders as an additional insured, but it will not extend coverage to Busy's directors, officers or employees.
  • A $5 million each occurrence limit Lucky's liability policy provides only a $1 million per occurrence limit. Lucky can consider purchasing an excess or umbrella policy, but obtaining such a policy will take time.
  • Pollution coverage (no pollution exclusion) Lucky's policy contains a standard pollution exclusion and the insurer will not remove it.
  • A clause stating that the policy conforms to the insurance requirements in the building contract A certificate is not part of the insurance contract. Thus, it cannot alter the scope of coverage provided by the policy.

    Linda explains that she cannot issue a certificate listing the above provisions because they are not included in Larry's policy. Doing so would be unethical and illegal. Larry becomes irate. He demands that Linda immediately provide a certificate that meets Busy Builders' requirements. If Linda won't comply, Larry will find an agent who will.

    In many states, Larry's actions would constitute a violation of the law. In some states, the actions of Busy Builders could also violate the law.

    State Laws

    In recent years numerous states have enacted laws to standardize the use of certificates of insurance. These laws are intended to ensure that certificates are used properly. While the laws vary from state to state they all have the same general intent.They prohibit the following types of acts:

    • Issuing a certificate that contains false or misleading information about an insurance policy. For example, Larry finds a new agent, who issues a certificate showing that his liability policy covers pollution. In reality, Larry's policy contains a broad pollution exclusion.
    • Altering or amending a certificate so that it does not accurately reflect the provisions in the policy. For example, Larry's agent issues a certificate that accurately represents his policy. Larry then alters the certificate, listing coverages his policy doesn't provide.
    • Using a certificate to afford or extend rights to someone when such rights are not provided by the policy. For instance, Larry finds a new agent, who issues a certificate showing that Busy Builders is an additional insured under Lucky Landscaping's liability policy. Busy is not really an insured under the policy.
    • Requesting a certificate that does not accurately reflect the policy For instance, a Busy Builders employee tells Larry to produce a certificate showing that Lucky Landscaping's liability policy provides a $5 million Each Occurrence limit. The employee knows that the limit on the policy is only $1 million. He requires the certificate showing the higher limit to satisfy Busy Builders' compliance department.

      In many states a certificate used in a manner described above would be invalid. Moreover, a person who committed any of these acts could be subject to prosecution.

      Certificates Are Not Policies

      Certificates of insurance are designed to provide evidence of insurance. They are intended to provide information, not coverage.

      Yet, some people have tried to use certificates to add coverage to a policy or to alter the policy's terms and conditions. In the scenario described above, Busy Builders tried to use a certificate to extend Lucky's policy so that it conformed to the insurance requirements in the contract. States are using certificate laws to stop this type of behavior. Some laws specifically prohibit the use of a certificate as a warranty that the policy complies with the insurance requirements in a contract. Many laws clearly state that a certificate is not a policy, a binder or an endorsement.

      Enforcement

      The new certificate laws are generally enforced by the state regulatory agency that oversees insurance matters. It isn't clear what penalties will be imposed on violators. In any case, anyone who provides certificates or requires them from others should be mindful of these laws. If you are not sure what laws apply to certificates in your state, consult your insurance agent or attorney.