Insurance Certificate Transparency Problem for Construction Work in NY

Re:       ACORD 25 and 855 Insurance Certificates

Dear Mr. Zuckerman and Ms. Lucashuk:

We are, respectively, the chairs of the Construction Law and Cooperative and Condominium Law Committees of the New York City Bar Association. We write to seek your advice and assistance regarding an insurance certificate issue that creates significant problems and loss for entities obtaining construction work throughout the State of New York.

As part of routine risk-management best practices, property owners, managers, contractors, lenders, and others regularly require that their contractors and subcontractors provide indemnifications and certificates of insurance (“COI”), typically an ACORD 25, that identify the respective owner entities or persons as “Additional Insureds” of their construction liability insurance policies. The purpose of the requirement is to ensure that coverage protection is extended to the named Additional Insureds for injuries and damages.  These certificates must be provided before contractors may commence work, and both contractors and owners believe that delivery of an ACORD 25 COI confirms that the insurance company named therein will defend and indemnify all Additional Insureds in the event of a claim.

All too often, however, named Additional Insureds find that the underlying insurance policy does not in fact cover them.  Attached as Exhibit A is a memorandum citing recent New York cases in which Additional Insureds were denied coverage.  The COIs were determined to be non-binding, as only the actual terms of the underlying policy controlled.  Thus, if the policy has exclusions from coverage which pertain to the loss, the COI can be rendered worthless.

Owners and consumers, particularly individual apartment and home owners and tenants, rely on the present form of the ACORD 25, attached as Exhibit B, to accurately summarize the underlying policy and provide proof of Additional Insured status.  But the ACORD 25 only provides policy limits, carriers, and policy effective and termination dates.  It contains no information about coverage exceptions and exclusions.  Moreover, relying upon Section 502 of the Insurance Law (copy attached as Exhibit C), brokers refuse to provide additional information in the “Exclusions/Special Provisions” box.  They assert that they do not have to provide any information at all, except as specifically set forth in the ACORD 25 form.  Beyond that, the ACORD 25 discloses no information about exceptions and exclusions commonly found in a particular policy, which often limit the scope of the protection and indemnification. 

Notably, the insurance carrier and the broker are aware of – or are supposed to be aware of – the provisions and exclusions of the policy sold to the contractor, whereas the named Additional Insured, as well as even the Named Insured, often lack that information.  In that regard, courts in New York have held that brokers are not liable to the certificate holder, generally a third party, for any misrepresentations or omissions from coverage set forth in the certificate the broker issues.

It is not feasible for every property owner, managing agent, contractor and attorney to obtain, review, and analyze each contractor’s and subcontractor’s full insurance policy before allowing work to commence.  Most contractors do not even have handy a copy of their own insurance policies.  While full review of the underlying insurance policies may be feasible in multimillion-dollar projects involving sophisticated owners, it is not realistic or cost effective for the vast majority of small and medium sized projects.  For example, a small restricted income co-op hires a contractor to perform a $10,000 hallway paint job and requires a COI naming it as an Additional Insured before the contractor may begin the work.  If the co-op has to hire insurance counsel to review the complexities of the contractor’s policy, to ascertain if there are height exceptions, exceptions for lead-based paint claims, etc., it will delay the project and add a substantial review fee to the cost of the work.  The problem is even greater for the individual unit owner who needs to hire a contractor to perform a $1,500 paint job and faces the same delays and expenses if the underlying policy must be reviewed in full.

While the ACORD 855, attached as Exhibit D, provides more information about the kinds of exceptions in a policy, the form is rarely used.  It is designed solely for the Named Insured and is rarely issued by brokers, who are not required to prepare it when issuing a policy.  It is also very difficult for lay people to understand without having knowledge of the various potential exceptions and exclusions.  And the ACORD 855, in its disclaimer, “confers no rights upon the certificate holder.”  The ACORD 855 is prepared for only the Named Insured, and thus an Additional Insured, both by case law and the language on the form, has no right to damages due to errors in its preparation or exclusions in the underlying policy.

Developers, building owners and contractors are looking to the insurance policies of others for protections but have no practical means of assuring they are available.  The exponentially rising costs of contractor liability insurance in New York State have encouraged the insurance industry to fine-tune policies and include numerous exceptions, in order to keep down both premiums and claims.  Yet, the public has no efficient way of determining the extent of these exceptions nor can they rely on the certificates being issued for this critical information.

We feel this is a serious transparency and consumer protection issue, well within the Department’s jurisdiction.  We note that recently, New Jersey enacted the “Certificates of Insurance Act” (17 NJ ST Subt. 3, Pt. 1, Ch. 29A, III) that prohibits, inter alia, the preparation of a certificate of insurance “that contains any false or misleading information concerning the referenced policy of insurance.”  The Act gives the Commissioner of the Department of Banking and Insurance the power to enforce its provisions, including the authority to issue orders to cease and desist and to impose fines.

We would like to discuss with you how the COI transparency problem should be addressed in New York, and solicit your advice on the remedy.

Respectfully,

Ronald Gold
Chair, Cooperative and Condominium Law Committee

Virginia K. Trunkes
Chair, Construction Law Committee