Insurance Requirements in Commercial Contracts (Part 5)

In the final part of our series, we will address certificates of insurance.  In Part 1, we touched on the importance of insurance provisions in commercial contracts, the use of outdated terms, and additional insured status.  In Part 2, we reviewed the difference between a deductible policy and a self insured retention.  In Part 3, we explained the difference in Loss Payee versus Lender Loss Payee status.  In Part 4, we discussed theft and crime coverage.

Business lawyers and deal makers are often given a Certificate of Insurance, which was typically prepared by the counterparty’s insurance broker on a standardized form (such as the Acord 25 form for liability insurance and the Acord 27 for property insurance).

Certificates of insurance should be considered, at most, to be a snapshot in time. They are a document that evidence that on a particular day, a particular insured had the insurance in place which is generally described on the certificate. However, the certificate will typically not note important exclusions. It will not discuss the deductible on the policy or whether it is actually a self-insured retention. And, if the insured cancels the insurance the very next day (or alters the coverage limits), the certificate holder will typically have difficulty finding out that the certificate represents a policy which is no longer in effect.  

Additionally, the “boilerplate” on these forms should be carefully read and considered by anyone who receives one. Certificates of insurance typically state that they are issued only for information purposes, and that they confer no rights. Certificates of insurance are not contracts, and they are especially not insurance contracts. Certificates of insurance, as the disclaimers plainly state, do not change the coverage that the actual policy provides.  

Because of this strong disclaiming language, and the fact that the certificates are usually prepared by the insurance broker, the certificates are unlikely to be binding on the insurer. When in doubt, also request a certified copy of the actual policy; do not rely on a certificate of insurance. If a counterparty balks at producing the actual policy, be concerned.

 Conclusion

This series was intended to shed some light on insurance provisions commonly encountered by transactional lawyers or deal makers when reviewing commercial agreements.  These are just a few of the commonly-encountered insurance provisions that commonly occur.  Often, the language used in commercial contracts (whether they be financing agreements, contracts, leases, or other documents) does not actually provide for the risks which the parties sought to cover or require insurance for. Poorly worded insurance clauses can cause confusion, can require commercially-unavailable insurance, or can simply frighten away customers with unnecessary requirements. If clients or counsel are unfamiliar with insurance, they should seek assistance from their own insurance brokers or an insurance lawyer.