Although maintaining insurance on equipment is usually a mandatory provision of financing agreements, the disclaimer language used on proof of insurance forms seems to render the certificates worthless. To help lenders protect their interests, Ken Weinberg discusses the different types of insurance certificate forms and specific items to monitor on each certificate.
Equipment finance agreements often include robust provisions addressing a variety of insurance issues, including obligations to maintain property and/or liability insurance. Of course, contractual provisions obligating the lessee or borrower to maintain insurance are of little value if the requisite insurance is not in full force and effect when the financed equipment is involved in an accident or other casualty event. Prudent equipment finance companies spend much time and effort obtaining evidence of insurance prior to funding and during the term of the financing. The majority of certificates evidencing insurance are on forms promulgated by the Association of Cooperative Operations Research and Development (ACORD), a not-for-profit standards-setting association for the insurance industry whose members and participants include thousands of insurance agents and insurance companies.
Disclaimers on Certificates
Given the importance of insurance, some readers of this edition of Dispatches from the Trenches may recall the first time they noticed language on one of the ACORD certificates stating, in bold capitalized letters, that the certificate or evidence of insurance “is issued as a matter of information only and confers no rights upon the [certificate holder or additional interest named below,] does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies below [and] does not constitute a contract between the issuing insurer(s), authorized representative or producer and the [certificate holder or additional interest named below].” Similarly, the language pursuant to which the insurance company promises to notify the lender of changes or cancellations of insurance policies generally provides “the failure to mail such notice shall impose no obligation or liability of any kind upon the insurer, its agents or representatives.” I vividly remember my shock at this language — and my immediate tirade laced with legal phrases, like “unconscionability” and “estoppel,” which are generally not the first line of attack in a commercial transaction.
For better or worse, the general concept of freedom of contract, which we rely upon when structuring and enforcing transactions against lessees or borrowers, is alive and well with respect to ACORD disclaimers. The Supreme Court of New Hampshire addressed the matter most bluntly, stating, “In effect, the certificate is a worthless document; it does no more than certify that insurance existed on the day the certificate was issued. We leave it to the legislature or to the future bargaining of parties to rectify inequities in the notification process.” (1)
Over the last 20 years, the results of the bargaining process have not been good for lenders or lessors. Consider the 2003 version of the ACORD 28 Certificate, developed with assistance from the Mortgage Bankers Association, which did not have the disclaimers, but provided the certificate “is evidence that insurance as identified below has been issued, is in force and conveys all the rights and privileges afforded under the policy.” Unfortunately, this certificate was not available for very long. Apparently without consulting any lenders, ACORD issued a new version in July 2006, which contained the same problematic disclaimer language. The various insurance certificates in circulation today generally have the same language (even the ACORD 23 revised in 2010 to specifically provide evidence of both liability insurance and property insurance for lessors and financers). Requests to use an older form of a certificate, or to modify any of the disclaimers or other language, are rebuffed strongly for reasons including the producers’ asserted lack of authority and/or because the forms were approved under state laws and regulations and cannot be modified.
A lender can best protect itself by obtaining and reviewing a copy of the actual insurance policy with all necessary endorsements. Lenders can also find significant comfort in the additional insured endorsement and the lender loss payable endorsement, along with certificates evidencing liability and property insurance. However, these approaches are more time consuming and costly than merely obtaining certificates and are utilized less frequently in the fast moving world of middle-market equipment finance, where our efficient, low cost and fast products are an important selling point within the marketplace.
For these reasons, reliance on the ACORD forms remains commonplace despite the disclaimers. Pessimistic readers may wonder why anyone should bother obtaining certificates of insurance given the disclaimers. However, an optimist can rightfully view the issue differently. So can lawyers, who understand all too well the logic of wearing a belt and suspenders after having pants tailored for a perfect fit when asked to render legal advice on how to keep one’s pants up. This latter group understands, even with the disclaimer language and case law on its side, a producer providing insurance certificates does not want to issue any certificates reflecting policies which are not in effect. The disclaimers are the proverbial suspenders in case of an error, despite the producer’s best efforts. If a lender requests the proper certificates, references the appropriate ACORD forms and insists on the information being correct, it will further decrease the chance of an error. In this respect, the effort of equipment finance companies can be viewed as time well spent.
To that end, the following items should be monitored on any certificate:
Insurance is often an important part of the protections required by equipment leasing and finance companies, and verifying the existence of proper insurance is an important part of due diligence. Although insurance certificates commonly used have disclaimers which may be held by the courts to invalidate claims against the producers or insurers, such parties should still be acting in good faith to issue accurate certificates. Although, like this article, the certificates may afford no rights to the holder/reader, I respectively posit that review of this article and insurance certificates from time to time are worthwhile endeavors.
After all, an equipment finance company with an understanding of the insurance certificate forms available, which works with producers to ensure the certificates issued are consistent with the equipment finance company’s requirements, should generally have more transactions with proper insurance in place than companies that fail to make such efforts.
(1) Bradley Real Estate Trust v. Plummer & Rowe Ins. Agency, Inc., 609 A.2d 1233, 1235 (N..1992).
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