A Little Something About Proof of Insurance (This Article Confers No Rights Upon the Reader)
by Kenneth Weinberg July/August 2018
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:
Property insurance should be evidenced on either an ACORD 28 or an ACORD 27 “Evidence of Property Insurance” certificate, if possible. The ACORD 28 has much more detail, making it easier to verify acceptable coverage. An ACORD 23 also works well but is less commonly used and is only for a single item of equipment. Producers often try to use the ACORD 25 “Certificate of Liability Insurance” but should provide the more preferable ACORD form when pushed.
The lessee or borrower with an interest in the equipment should be identified as an “Insured” near the top left of the certificate.
The “Property Information” (on the ACORD 27/28) or the “Description of Operations/Locations/Vehicles” (on the ACORD 25) should be sufficiently broad to cover the leased or financed equipment. The equipment and locations can be separately scheduled with an Additional Remarks Schedule (ACORD 101).
The amount of coverage and deductible should be consistent with the lease or loan requirements.
The type of coverages should be consistent with the lease or loan requirements.
For liability insurance, the equipment finance company should be listed as additional insured when its policies require it to be covered in case a third-party sues because of damage or injuries caused by the equipment. This notation is often included in the “Description of Operations/Locations/Vehicles.”
For property insurance, the lender must be the loss payee or, preferably, the lender’s loss payee. A loss payee status means the insurer will pay the proceeds of any property claim jointly to the insured and the loss payee, as their interests may appear. Any defenses to payment (including breaches of the policy by the lessee or borrower) will enable the insurer to deny payment. A lender’s loss payee status affords additional benefits, including the right to receive payment even if the lender’s or borrower’s claim is denied because of its acts or failure to comply with the policy so long as the lender’s loss payee pays any outstanding premium and complies with certain additional terms of the lender’s loss payable endorsement. The ACORD 27/28 has a box to check for this item (although the ACORD 27 uses the term mortgagee instead of lender’s loss payee).
For property insurance, the lender should try to be listed as additional insured even though some insurance companies and lawyers will argue the term loss payee applies to property coverage and the term additional insured applies to liability coverage. An additional insured is not necessarily the payee of a check covering a loss of the equipment, but it has other rights under the policy. To cover all bases, it is best for a lender to be designated as both additional insured and loss payee on property insurance. The ACORD 27/28 has a box to check for this item.
The bottom left hand corner of the form, where “Additional Interest” or “Certificate Holder” is listed, should include the proper name of the lender and its successors and/or assigns as their interest may appear (sometimes abbreviated ISAOA ATIMA).
Equipment finance agreements often specify how much advance notice the lender must have from an insurer before any cancellation, expiration or changes are made to the required insurance. Many insurance certificate forms in circulation only provide that notice will be delivered in accordance with the policy provisions. If a certificate is issued stating the insurance company will endeavor to provide notice of such events within a certain period of time, the specified time period should be consistent with the financing documents or internal policies. Although many equipment finance agreements continue to require 30 days’ prior notice, some insurers will not provide more than 10 days’ notice.
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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