Commercial Lenders Beware! Top Reasons Why You Should Not Trust Certificates and Evidences of Insurance
By Joseph Garibyan
A court once described a certificate of insurance as a “worthless document” and that description is arguably still accurate. Lenders typically demand that borrowers show evidence of property insurance in an adequate amount to repay the loan if the property is destroyed by accident when making real estate-secured loans. Loan servicers also desire substantial insurance certificates since their agreements mandate verifying the existence of property insurance and its timely renewals, but the vast number of loans they manage makes it impossible to examine each policy in detail.
The typical evidence of property insurance is a certificate of insurance granted by an insurance broker or agent. It’s important to note the distinction between an insurance broker and an insurance agent when examining the certificate. An insurance agent usually represents one insurer and is authorized to bind the company, subject to any limits in the contract between the insurer and agent. In contrast, an insurance broker generally represents the insured in acquiring insurance from a variety of insurers. Although an insurance agent has extensive authority to act on behalf of the represented insurer, an insurance broker’s power is limited to the degree that the insurer grants contractual authority to the broker. In the industry, agents and brokers are sometimes collectively referred to as “producers.”
Courts often reference the definition of a certificate of insurance as found in Black’s Law Dictionary: “A document that acknowledges the existence of an insurance policy and provides a general description of what the policy covers” (Black’s Law Dictionary 256, 9th ed. 2009). Certificates of insurance have been utilized for a long time, but the Association for Cooperative Operations Research and Development (ACORD) first created standardized forms for them in 1976. These ACORD forms are not considered insurance policies that require approval from state insurance commissioners. In contrast to ACORD, Insurance Services Office, Inc. (ISO) creates standard insurance policy forms that are authorized by the states and that insurers can purchase.
ACORD creates various forms, and one of them is the ACORD 28, which pertains to property insurance for commercial properties. The form is titled “Evidence of Commercial Property Insurance,” and the use of the word “evidence” instead of “certificate” indicates that it is given to someone who has a direct stake in the insured property, such as a mortgagee.
If a borrower obtains a new property insurance policy concurrently with a closing, the insurer can supply a binder, which is a provisional insurance contract that serves as proof of insurance until the official policy is generated. The ACORD 75 is an example of an insurance binder. However, lenders view binders as inadequate replacements for policies because they do not include all of the policy terms. Binders also typically have a short expiration period, often six months or less as specified by state law. It is conceivable that a binder could expire before a policy is issued because insurance companies are notorious for being slow to provide policies after receiving the premium payment. Policies for commercial properties and large multi-family properties frequently require more time to issue than policies for small multi-family and residential properties since the insurer inspects the property before issuing the policy.
How the Current ACORD 28 Was Developed
Prior to 2003, an ACORD 24, “Certificate of Property Insurance,” was typically provided by insurance agents to their clients as proof of property insurance. The ACORD 24 explicitly stated that it was issued for information purposes only and did not grant any rights to the certificate holder or modify the insurance coverage. The certificate also mentioned that the insurer would attempt to send a notice to the certificate holder if the policy was cancelled, but the lack of notice would not hold the insurer liable. However, knowledgeable lenders preferred to use the ACORD 27, “Evidence of Property Insurance,” which was proof that the insurance policy identified in the form was active and conveyed all the rights and privileges given by the policy. The ACORD 27 also obligated the insurer to notify the lender before cancelling the policy. For additional information about the differences between the ACORD 27 and a prior version of the ACORD 24 (the ACORD 25-S) and concerns with the latter in the context of commercial real estate loans, refer to Alfred S. Joseph III & Arthur E. Pape, Certificates of Insurance: The Illusion of Protection, Prob. & Prop. 54, Jan./Feb. 1995.
The destruction of the World Trade Center on September 11, 2001 raised a number of issues in litigation, including the question of which policy form defined the property insurance coverage for the building, which had been bound in July 2001 but not yet issued. This highlighted the need to confirm the existence of property insurance, and in 2003, ACORD collaborated with the Mortgage Bankers Association to release a new form, the ACORD 28, “Evidence of Commercial Property Insurance.” This form included the same language as the previous ACORD 27, indicating that it conveyed all the rights and privileges afforded under the policy and that the issuer would provide written notice before cancelling the policy. The ACORD 27 was also updated for use in residential and personal property transactions.
ACORD revised the ACORD 28 in July 2006. The change was made due to the insurance industry’s concern that the previous 2003 form expanded the insurer’s obligations beyond the policy’s terms. However, the revised form significantly reduces the document’s usefulness by stating that it is issued only for informational purposes and does not grant any rights to the additional interest named. The revised form does not amend, extend, or alter the coverage provided by the policies listed. If any of the policies listed are cancelled before the expiration date, the insurer will try to give written notice to the additional interest named, but failure to do so does not impose any obligation or liability on the insurer, its agents, or representatives. The 2006 form also makes it clear that it is subject to all of the terms of the policy. Essentially, the revised form brings the ACORD 28 back to the old ACORD 24 for practical purposes.
The alterations made to the ACORD 28 in 2006 were not well-received by lenders who were not informed about them. Their main criticisms were directed towards the removal of the obligation to give notice of cancellation and the new “information only” language. Freddie Mac, in particular, refused to accept the 2006 ACORD 28 due to a conflict with the standard mortgagee loss payment endorsement, which requires notice of policy cancellation to be given to the lender. These changes posed a significant issue for lenders who had made nonrecourse loans, as the property and the insurance proceeds were their sole source of loan repayment. The modifications to the form also had an impact on the commercial mortgage-backed securities sector, with rating agencies deciding to exclude loans that relied solely on the 2006 ACORD 28 for proof of property insurance from pools of loans being securitized.
To address concerns from mortgage lenders and insurers over the changes made to the ACORD 28 in 2006, ACORD established a working group consisting of representatives from both industries and insurance producers. The goal of the group was to come to a consensus on changes to the form that would address the concerns of lenders. Starting in February 2007, the group held weekly telephone calls. During these meetings, representatives from each industry explained their stance on the “information only” language present in the form.
The producers opposed the removal of the “information only” language, arguing that they were not compensated for providing the form or for any potential liability to the lender. The insurers argued that certificates of insurance could not amend policies or impose obligations on the insurer, and the “information only” language accurately reflected this. Insurers also noted that certificates are often issued by unauthorized producers who do not send the certificates to the insurer. They recommended that lenders get binders or endorsements for policies to protect themselves, but lenders argued that this would be costly and time-consuming for borrowers. The administrative burdens also continue after closing, as lenders and servicers must ensure policies are renewed or replaced. Lenders argued that a reliable certificate of insurance was in the best interest of customers of insurers and producers. ACORD formed a working group of representatives from mortgage lenders, insurers, and producers to address these concerns.
During the weekly telephone calls of the ACORD working group, the members reviewed and discussed proposed forms of changes to the ACORD 28 and were able to tentatively agree on alternative notice provisions. However, they were unable to come to a consensus regarding the “information only” language despite several attempts, leading to a hiatus in May 2009. The National Association of Insurance Commissioners suggested mediating the issue, but no agreement was reached on the terms.
Legislative and Administrative Actions
The insurance industry has received support from state legislatures and insurance departments. California was among the first states to act in favor of the industry, enacting a statute in 1978 which mandates that certificates of insurance must specify that they do not change the policy and are subject to its terms. Similarly, some commissioners of insurance have issued bulletins through administrative rulemaking authority, which limit the use of certificates of insurance in various states. In 1997, the New York Insurance Department released a bulletin advising government agencies and corporations that a certificate of insurance could not alter or extend coverage, and that it was not the most reliable evidence of policy terms, even if completed by a licensed producer.
Producers have been encouraging states to take action in recent years, and this has resulted in a significant increase in state activity. The Independent Insurance Agents & Brokers, for example, has published a Model Bulletin on Issuance of Certificates of Insurance on its website. This model bulletin has been adopted by at least 32 states, either through statutes or bulletins, and further limits the usefulness of certificates of insurance. The Nebraska Department of Insurance adopted this model bulletin in 2008. These bulletins typically require producers to file certificates for approval by the state insurance department before issuing them, and require any certificate to state that it does not amend, extend, or alter the coverage provided by the policy. In addition, most administrative bulletins prohibit producers from altering the ACORD form.
Courts and Certificates of Insurance
Courts have typically upheld the enforceability of disclaimers in certificates of insurance, upholding the validity of an “information only” disclaimer in a certificate, and holding that the certificate merely certifies the existence of insurance on the day it was issued, and that any inequities in the notification process should be addressed by the legislature or parties. Similarly, the disclaimer of liability for failing to give notice has also been deemed enforceable. Though there are exceptions, such as cases where the producer had apparent authority or made additional representations, these tend to be uncommon.
What is a Certificate of Insurance Worth?
Not much. In summary, the ACORD 28 contains a disclaimer that courts have typically upheld, and most states have enacted laws or issued bulletins preventing modifications to the ACORD certificates. Additionally, property insurance policies generally require policy changes to be made by endorsement issued by the lender. Given these limitations, is it worthwhile for lenders to use the ACORD 28? Although the certificate only provides a snapshot of coverage at the time it is issued, it may still be of some value to the lender. If the producer issuing the certificate provides incorrect information and the lender suffers a loss as a result, the lender may have grounds to sue the producer. While most producers have E&O insurance, this is not a reliable source of recovery for the lender.
How Can Lenders Protect Themselves?
To ensure protection from the borrower’s property insurance, a lender needs an endorsement from the insurer that acknowledges the lender’s interest. ISO property insurance policies contain a mortgagee clause, also known as a lender’s loss payable clause, that grants special protection for mortgagees. The mortgage clause usually stipulates that payment of a covered loss will be made to the lender instead of the borrower, and that the lender is entitled to payment even if the insurer has a defense against a claim by the borrower. Additionally, the lender will receive written notice of cancellation, with the insurer typically providing ten days for non-payment of premium and thirty days for other reasons. The insurer will also notify the lender if they choose not to renew the policy. However, most policies require the lender to be named in the policy through an endorsement to have these contractual rights. Lenders must review the endorsement’s wording as some may limit their rights. If a lender uses a binder, they can request that a copy of the mortgage clause be attached to it.
It is important to distinguish the mortgage clause from a general loss payee endorsement or additional insured endorsement. The mortgage clause typically provides coverage to the mortgagee despite the acts of the insured, but the loss payee and additional insured endorsements do not.
Although by requiring the insurer to give notice the mortgage clause protects the mortgagee if the insurer cancels the policy, a mortgage clause does not protect against the risk that the borrower will cancel the policy. Most states have laws that permit an insured to cancel the policy at any time.
Lenders and servicers also use mortgage impairment insurance as an additional means of protecting themselves. This type of insurance, also known as mortgage-holders errors and omissions coverage, provides property insurance coverage in situations where the mortgaged property is not insured or is underinsured. Additionally, it offers liability insurance to protect against losses resulting from errors and omissions in the procedures followed by the insured party in obtaining and maintaining property insurance.
The present edition of the ACORD 28 holds minimal importance for mortgagees. To ensure complete protection, mortgagees must obtain the advantages provided by the standard mortgagee clause, either through endorsement for existing policies or a binder containing a copy of the endorsement or the standard mortgage clause attached for new policies.
 Bradley Real Estate Trust v. Plummer & Rowe Ins. Agency, Inc., 609 A.2d 1233 (N.H. 1992).