Certificates of Insurance: Is the tail wagging the dog?

May 25

5 min read

Liabilities between contracting parties are commonly addressed through risk transfer mechanisms like additional insured enrolment, backstopped by a Certificate of Insurance ("COI"). For instance, a commercial kitchen lends their space to a film crew. The kitchen requires the filming company to name them as an additional insured in their insurance, in case the filming activities expose the kitchen to liability.

The issue frequently arises in construction, leasing, transportation, retail, entertainment, event planning and more.

Typically, commercial parties seeking additional insured enrolment do not merely assume this will be completed but also keep a record of this by requesting the COI. After all, just because a party agrees to do something, it doesn’t necessarily mean that they have, and insurable liabilities can materialize long after the underlying contract was performed.

This is so common a practice that many large institutions like government bodies publicly describe the necessity of COIs as “evidence of insurance”.

In many cases, this process of COI verification is uncontroversial: The party facilitating the enrolment instructs their broker to name the additional insured and the COI mirrors the reality.

However, what happens if an insurer denies coverage to a would-be additional insured in the following scenarios?

1. The insurer has no record of enrolling the additional insured (whether due to broker error or insurer error).

2. The policy only enrols the additional insured for part of the coverage required by contract (e.g. defense but not indemnity).

The instinct of the would-be additional insured is to hold up the COI to the insurer and say, “but my COI says otherwise”. To which the insurer would presumably reply, “The COI does not control the policy. We have no contractual relationship”.

The problem with COIs

Part of the problem is one of contractual “privity”. A commercial contract between two parties cannot influence another contract (of insurance) between two other parties. If the broker or insurer for the film crew from the example above failed to reflect the intention for the kitchen to be additionally insured, the kitchen has no direct recourse against the broker or the insurer. A failure to enrol the would-be additional insured is at most a breach of contract, which may not be apparent until after the parties have moved on.

The other part of the problem is the nature of a COI. COIs do not create rights or amend the policy referenced, which reflects the following wording at the top of most standard-form certificates:

“This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies below. This certificate of insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder.”

[Original is capitalized]

In the context of additional insured enrolment, COIs typically only identify a policy exists and the primary policyholder. Generating a COI is not necessarily contingent on the fulfilment of that enrolment. Nor does a COI contain enough information to determine what has been reflected in the policy or when.

A subcontractor may not be allowed on a construction site until they’ve provided their COI to the would-be additional insured. This does not guarantee the additional insured is recorded as such on the policy.

The decision in Royal & Sun Alliance Insurance Company of Canada v Co-Operators General Insurance Company, 2023 ABKB 426 illustrates the complex and costly implications of uncertainty around additional insured status. The Court there noted the limitations of the COI but stopped short of making a finding on the legal effect of that COI in those circumstances.

The alternative

Case law from Ontario offers a helpful reminder about best practices. Writing for the Court of Appeal in Sky Clean Energy Ltd. v. Economical Mutual Insurance Co., 2020 ONCA 558, Chief Justice Strathy observed:

[64] It is common for additional insureds to be added by an endorsement to the policy, setting out the risks for which the additional insured is covered: … When this occurs, the broker may issue a certificate of insurance to the additional insured. But the certificate is typically evidence of the policy only. The actual terms of the policy govern…

…

[71] Conflicts may occur because the contractor obtained insurance that does not track the language of the contractual indemnity. The wording of the insurance policy may either be broader or more restrictive than what the contractor agreed to obtain. Another source of conflict may arise when the additional insured fails to obtain and read the policy of insurance and simply relies on the receipt of the insurance certificate, which simply confirms that the contractor has insurance without providing evidence of the terms that protect the owner. An owner who expects to be an additional insured should obtain a copy …of the insurance policy and the endorsement to ensure that the appropriate coverage has been obtained… And if a potential claim arises, the owner should ensure that it complies with the policy's requirements.

[Emphasis added]

As the Court notes, proof of coverage can be found in an endorsement or the policy identifying the additional insured by name or by category. Unlike the COI, an endorsement is policy wording that does confer rights.

Why doesn’t everyone just get the endorsement or policy? Generally, the pace of insurance documents lags behind commercial realities. So a prudent would-be additional insured is forced to accept a COI, initially, and insist on an endorsement or full policy when (or if) that becomes available. There is also a general reticence by some parties to release any aspect of their insurance policy. The administrative lift of this process has created whole businesses (mainly in the US) that review and manage additional insured verification.

Unlike in the U.S. where the production of standardized additional insured endorsements is more routine, some policies in Canada may not lend themselves to producing a standardized endorsement. Unfortunately, this burdens both the grantor of the additional insured status and the grantee (particularly when the grantor resists disclosing their policy). Parties whose commercial relationships depend on the availability of additional insured status should therefore investigate strategies to manage this issue as part of their pre-contractual due diligence.

More than just a policyholder issue, brokers also have a stake in scrutinizing their practices around proof of insurance verification and informing clients about their limitations. Of course, the avoidance of E&O claims is a strong incentive. In the humble opinion of this policyholder lawyer, there is probably an untapped opportunity for brokers to distinguish themselves in a competitive market with enhanced additional insured verification.