United States: ACORD, But No Satisfaction: The Recent Changes In Certificates Of Insurance

Building & Bonding: The Construction Group Newsletter

In September 2009, a change made to the Association for Cooperative Operations Research and Development's (ACORD) Form 25, Certificate of Liability Insurance, eliminated language in the old form where the insurer agreed to "endeavor" to provide notice to the certificate holder of a cancellation of the first named insured's policy—and instead clarified that the policy itself governs the duty to notify of cancellation of the policy.

This change has only recently begun to affect the marketplace because ACORD gives its brokers a year before they are required to start using the new form.

The change in the language arose in response to comments from insurance commissioners' offices in several states that the prior language may have been misleading. A basic tenet of insurance law is that a certificate of insurance cannot modify or amend the terms of an insurance policy. Regarding notice of cancellation, most policies did not require the insurers to notify certificate holders or additional insureds; rather, the insurer's duty to notify ran only to the first named insured. Thus, if the old ACORD certificate stated that the insurer would "endeavor to" notify certificate holders—many of whom were additional insureds—that could be construed as misleading, even if the old certificate also contained language that the insurer could not be held liable for failure to provide such notice.

Another reason for the language change may have been that the old ACORD certificate contained one blank that had to be filled in to clarify the number of days before cancellation that the notice had to be provided. Typically, the number 30 was inserted, to show that the insurer would endeavor to provide 30 days' notice. An issue with that language, however, was that most policies required only 10 days' notice if the reason for the cancellation was failure to make payment of the insurance premiums. Therefore, the fact that the certificate had only one blank to fill in—when there were two different time periods that might apply—made the language all the more inaccurate.

Now that the ACORD certificate with the new language is required, and will now be the standard form seen in the marketplace, the following question arises: Should any action be taken?

The simple answer is "yes," but different action is suggested for different scenarios.

The most basic action that should be considered is to review pending contracts to determine if the change in the terms of the ACORD certificate leads to a situation where the lower-tier party cannot comply with the insurance provisions of its construction contract. This could occur in an owner–general contractor contract, if that contract requires the general contractor to provide a certificate of insurance that requires the contractor's insurer to provide notice to the owner regarding the cancellation of the contractor's liability policy.

Inability to comply with contract terms could easily occur, because many contracts have provisions that require the general contractor to deliver a certificate of insurance that contains specific language. For example, the American Institute of Architects' (AIA) A201 "General Conditions" contains such language, as follows:

Similarly, the ConsensusDOCS 200 "Standard Agreement and General Conditions between Owner and Constructor" contains a provision requiring a contractor to provide insurance that provides notice to the Owner of a cancellation of the policy:

Thus, if the contract under review contains language such as that noted above, but there is no longer any "endeavor to" language in the ACORD certificate to satisfy that contractual obligation, a general contractor could easily be in violation of its contract if the policy follows the familiar path of not requiring the insurer to provide notice to anyone other than to the general contractor as the first named insured.

In such a case, the following possible solutions may be worth consideration.

Starting with the easiest scenario, the policy might already require the insurer to provide notice to certificate holders or additional insureds. If so, a copy of the relevant portion of the insurance policy can be appended per the new ACORD certificate as "additional evidence" on a separate sheet, as part of the certification that the policy complies with the contractual requirement.

If the insurance policy does not require the insurer to provide notice of cancellation to certificate holders or additional insureds, it may be possible to add an endorsement to the insurance policy whereby the insurer agrees to provide notice of cancellation to specified entities. This endorsement could take two forms. The first form would list specific entities to whom the insurer agrees to provide notice (see, for example, The Travelers Indemnity Company form IL T4 00 12 09). The second form would be for the endorsement to reflect the insurer's agreement to provide "blanket" notification to a list of organizations shown on a schedule provided by the first named insured (see, for example, Zurich American Insurance Company form U-GL-1114-A CW). It is more likely that an insurer would be willing to agree to an endorsement in which the specific names are included when the endorsement is added, to potentially avoid any additional administrative burden on the insurer if the need for providing notice arises at a later date. It is important to note one concern with this approach: As a practical matter, insurers may take many months to issue endorsements, much longer than the time it takes a broker to issue an updated certificate. Therefore, the endorsement approach may not be speedy enough to serve as a practical solution.

Now consider the scenario that may be more challenging to resolve: If the insurance policy does not contain language compatible with the contractual obligations and the insurer will not agree to add an endorsement addressing the issue, then the lower-tier party (in this case, the general contractor) who needs to be in compliance with its contractual obligations may have another way to address the issue. Perhaps the contractual language is vague about how the notice can be given. Indeed, neither the AIA nor the ConsensusDOCS language cited above specifies that it is the insurer who must provide the notice. Rather, the language is written in the passive tense—merely that notice of cancellation must be provided. Thus, the possibility remains that the lower-tier party could comply with its contractual obligations by giving the required notice (typically 30 days). To be safe, perhaps the lower-tier could suggest that the two parties enter into a no-cost change order, clarifying that the lower-tier party can provide the notice itself. The higher-tier party (the hypothetical owner) may object to this approach because of the risk of having to rely on the lower-tier party for notice, when the likely reason for having to provide the notice is the fact that the lower-tier contractor has failed to pay its insurance premium. As a practical matter, if the lower-tier party cannot pay its insurance premium, the higher-tier party may have more concerns about the lower-tier party's ability to perform the contract other than the lapse of insurance coverage. Perhaps having a promise of notice from the lower-tier party is better than nothing.

The higher-tier party can gain some comfort that the lower-tier party's insurance remains in place by requiring the lower-tier party to provide new and updated certificates of insurance on a monthly basis—perhaps with payment applications—in order to confirm that the insurance remains in place. Even if there is a cancellation without prior notice, the period that could be subject to the lapse of coverage would be relatively short and contained.

If the higher-tier party refuses to enter into a "no-cost" change order to address the changes in the ACORD certificate, the lower-tier party may provide notice to the higher-tier party that its refusal to accept notification from the lower-tier party is a force majeure event, should the lower-tier party be able to show that its inability to comply with the contractual requirements arises from actions beyond its control.

It is important to consider that both parties might try improving their abilities to track the dates on which policies expire. Third-party vendors can help with this task.

Finally, the risk of cancellation of a policy may not be the largest risk that a higher-tier party faces. The greater risk to an owner may be that its general contractor fails to assure that its subcontractors continue to provide new certificates of insurance after the coverage period reflected in the certificate of insurance provided when the subcontracts originally commenced. Thus, a renewed sense of vigilance, to confirm that the insurance required to remain in place for the duration of a project actually does remain in place, may be a favorable benefit of issues raised by the new ACORD forms.

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

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