|July 20, 2011||volume 10 issue 29|
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The Additional (Un)Insured: Do Certificates of Insurance Protect You in New York?
by Ryan M. Finn and Daniel M. Bernstein, Bond, Schoeneck & King, PLLC, Albany, NY
Almost every construction contract contains a similar clause requiring the contractor to name the owner as an additional insured on its insurance policy. As a condition of performing work on the Project, the contractor is generally required to present a certificate of insurance (COI) to show that the required insurance is obtained.
Most owners accept the COI, assuming that the required coverage is in place. The owner assumes that if something goes wrong, “That is why I have insurance.” But far too many owners, contractors and subcontractors have found out the hard way that these certificates, while meant to confirm coverage, are many times illusory.
The COI problem is generally one of timing and order of operations. The certificate is almost always issued by a broker or agent, and can be generated in a matter of seconds on a computer. It is usually printed before any change to the actual insurance policy is made, or even requested. However, when the owner receives the COI, he or she assumes the changes have been made and allows the contractor to begin work.
This is where the disappearing act happens, in three simple steps. First, an injury occurs before the policy is changed. Second, the owner submits a claim. Third, the insurance company says, “What coverage?” and of course points to the COI which conspicuously states that it is for “information purposes only” and is not an actual change to the policy.
Imagine, for example, that an owner hires a general contractor (GC) to build a condominium. Owner obtains a COI from GC “confirming” coverage. Three weeks into the project, an employee of a subcontractor is injured, sustaining catastrophic injuries. When the owner tenders the claim to the GC’s insurance company, the owner receives a prompt disclaimer, stating that the policy has no additional insured endorsement in place.
Owner calls your office looking for guidance. You immediately ask your client, “Did you tender the claim to your own insurance company?” You are shocked to learn that this sophisticated developer carried no insurance on the job because of the mistaken belief that the contractor’s insurance would cover it. You are told that, other than the insurance coverage, the contractor is insolvent, so a breach of contract claim (for failure to procure the required insurance) is a waste of time.
You continue to ask several questions, and the owner angrily interrupts: “Just tell me, can I sue the insurance company and make them pay to defend this claim?” You swallow hard, and state as confidently as you can, “It depends.”
In New York, as with many jurisdictions, the reality is that reliance upon a certificate of insurance is dangerous. The cases deciding the issue are numerous and complex, and the Departments are split over whether an estoppel theory can be used against the insurer.
In the First and Second Departments, the courts have rejected this type of claim. These courts have embraced the general principle that coverage cannot be created where none exists, and find reliance on certificates of insurance “misplaced.” See Am. Ref-Fuel Co. of Hempstead v. Res. Recycling Inc., 248 A.D.2d 420, 424 (2d Dep’t 1998); Nicotra Grp., LLC v. Am. Safety Indem. Co., 48 A.D.3d 253, 254 (1st Dep’t 2008); Penske Truck Leasing v. Home Ins. Co., 251 A.D.2d 478, 479 (2d Dep’t 1998).
The Third and Fourth Departments are more likely to grant equitable relief. Here courts have found an owner’s reliance on a COI to be reasonable and have ordered insurance companies to provide coverage. See Niagara Mohawk Power Corp. v. Skibeck Pipeline Co., 270 A.D.2d 867, 869; Bucon, Inc. v. Pa. Mfg. Ass’n Ins. Co., 151 A.D.2d 207, 210 (3d Dep’t 1989)). In addition to reasonable reliance, the owner must show that the agent or broker had the authority to issue the COI. Id.
Last year, the New York Court of Appeals was scheduled to settle the frustrating Department-split when the Second Circuit certified the following question: "In a case brought against an insurer in which a plaintiff seeks a declaration that it is covered under an insurance policy issued by that insurer, does a certificate of insurance issued by an agent of the insurer that states that the policy is in force but also bears language that the certificate is not evidence of coverage, is for informational purposes only, or other similar disclaimers, estop the insurer from denying coverage under the policy?"
Unfortunately, this was left unanswered; the parties to the case settled and the Second Circuit withdrew the question. See 10 Ellicott Square Court Corp. v. Mountain Valley Indemnity Company, 634 F.3d 232 (2d Cir. 2011).
The split survives for now, leaving you to wonder if your certificate of insurance is not at all what the name implies. To avoid an empty promise of coverage and a potentially unsympathetic court, you should always obtain a copy of the actual additional insured endorsement. Review the document and make sure it provides the coverage that you expect, and, make sure the contractor and the insurance company notify you of any changes to the policy.