National Underwriter - August 15 2011

Certificates Of Insurance: What Do They Really Cost Your Agency?

Offering this “free” service costs a lot in staff time—and exposes agencies to huge E&O risks
■ CERTIFIED PAIN

BY BILL WILSON

ONE OF THE most daunting (and often reviled) tasks facing agencies today involves the processing of certificates of insurance. This is an activity that typically generates no revenue for the agency but creates significant operational costs and dramatically heightens the agency’s E&O exposure.

One consultant estimates the cost to issue a plain-vanilla ACORD 25 document at $7; and if some cus-tomization is required, it could be as much as $15-18. This figure could go even higher when responding to requests that insist upon the completion of some sort of “ compliance checklist” that consists of dozens of broad, vague, generalized questions about policy coverages.

For example, an agent was given a multi-page questionnaire he was required to complete, along with an “affidavit” warranting that coverage was in place and conformed to the construction contract (of which he had read two of 88 pages) that was to be notarized and witnessed by a disinterested third party and sent to the certificate holder via certified mail. This document required that over 400 entries be completed.

These affidavits and checklists often want the agent to proclaim that the insurance policy(ies) are in compliance with indemnity agreements the insured has entered into—when the reality is that they almost never do.

One producer and a customer-service
representative (CSR) spent two and a half
hours on one certificate that had to be re-
done four times. The last time was because
a field on the form was not applicable, and
the CSR had entered “NA”—but the certifi-
cate holder would only accept an entry of
“N.A.” So they had to reissue the certificate
and add the two periods after the “N” and
“A.” The contractor was due $300,000 on
a job, and the GC refused to pay until the
certificate met expectations to the letter
(or, better, punctuation mark).

There is a trial court case
proceeding involving a flood
loss where the certificate of
insurance allegedly indicated
more flood-insurance
coverage than was actually
provided. The amount at stake
is $150 million.

1) The insured requested an additional-insured endorsement as required by the construction contract, but the agent failed to obtain it. The claim was settled for $180,000. (At least three independent studies indicate that 40-50 percent of all certificates that indicate additional insured status are incorrect.)

2) In another claim, an agent used a blanket additional-insured endorsement. However, it required that AI status requests arise from written contracts. There was no written contract, so the blanket AI endorsement was not triggered. The cost to settle? $445,000.

3) In the third and last example, an account was nonrenewed, and the agent could not find another market. The insured found an E&S carrier, but the carrier couldn’t or wouldn’t issue certificates of insurance. As a favor to his former client, the agent used the firm’s agency-management system to issue 4,000 certificates. As it turned out, the coverage was not actually in force. Following several accidents, including a fatality, an E&O lawsuit was filed. Settlement cost: $10,290,000.

At the moment, there is a trial court case proceeding involving a flood loss where the certificate of insurance allegedly indicated more flood-insurance coverage than was actually provided. The amount at stake is $150 million.

The costs associated with certificates of insurance are not trivial, whether you’re considering operational expenses or potential E&O claims. To learn more about risk managing your certificates-of-insurance exposure, visit the Big “I” Virtual University’s free Certificate Resource Center at www.iiaba.net/VU. NU