Basics of Insurance Certificates and Evidence of Insurance for Lease Transactions

Real estate industry participants and members of the insurance community have engaged in discussions for some time addressing the scope of coverage and protection afforded by the various forms of insurance certificates available in the marketplace.  One can see the effects of this debate in the area of commercial leasing.  Most commercial leases require the tenant (and sometimes, the landlord) to provide certificates of insurance or other evidence of insurance.  A Landlord in particular needs to confirm that its tenants carry appropriate insurance and that such insurance provides the landlord (and perhaps its lender) with certain protections.  Prior to the commencement of the lease term, or before a tenant is permitted to enter the premises to perform any work, the tenant is typically required to deliver evidence showing the tenant’s satisfaction of the insurance requirements agreed to by the parties in the lease.  As a result, having a basic understanding of the rights, benefits and risks attendant in relying upon insurance certificates is important.

A recurrent problem is that the underlying insurance policies are often not available on what one or the other party to a lease transaction believes to be a timely basis.  Even if the policies are readily available, the reader may lack sufficient knowledge and experience to evaluate fully all of the policy terms and conditions contained in these often lengthy documents, and the policies may cover numerous sites on a blanket basis, further complicating the review.

While not all issuers of insurance certificates use the same forms, the forms of certificates developed by ACORD (Association for Cooperative Operations Research and Development) have served as a standard in many lease transactions.  Certificates of insurance are typically issued by an agent or broker for the named insured and set forth the coverages written for the insured.  However, the ACORD forms of certificates in use today typically state that they are for “informational purposes only.” These certificates provide that they cannot modify or amend the coverage of the insurance policy.

The most common certificate form issued and frequently obtained in lease transactions is the ACORD 25 (2010/05) form -Certificate of Liability Insurance.  Pursuant to the terms of this form of certificate, the issuance of the certificate does not itself entitle the certificate holder to any rights under the insurance policy or policies referenced in the certificate, and if any policy referenced in the certificate is cancelled before its expiration date, notice will be delivered in accordance with the policy provisions.  Accordingly, unless a policy’s provisions explicitly provide for notice to a party that is also listed as a certificate holder on the certificate of insurance, the insurer is not obligated to notify that party.  Therefore, if any party in addition to the first named insured in the policy desires to receive a copy of a cancellation notice in the event the policy is cancelled, that party must be expressly endorsed onto the policy itself as a cancellation notice recipient.  To change terms of the policy itself, an endorsement must be (1) generated by the insurer (or an agent acting on behalf of the insurer), in writing, and (2) attached to the insurance policy itself.  A copy of such an endorsement should be attached to the certificate.

A policy of liability insurance must specify that the party seeking coverage (e.g., the landlord) has been named as an “additional insured” in the policy or policies for which the named insured (e.g., the tenant) has agreed to provide coverage.  A certificate that merely states that the property owner or landlord is a “certificate holder” does not make the owner/landlord an additional insured.  Without being named as an additional insured, a certificate holder is not entitled to any rights under the insurance policy referenced in the ACORD 25 (2010/05) certificate.

The other certificate forms most frequently used in lease transactions are the ACORD 27 (2009/12) form - Evidence of Property Insurance and the ACORD 28 (2011/11) form - Evidence of Commercial Property Insurance.  Despite the fact that the word “evidence” appears in the title of these forms, since 2006 the certificate forms themselves have explicitly provided that they are issued as a matter of information only and that no rights are conferred upon the certificate holder.  (Although outside the scope of this memo, it is worth noting that various real estate industry groups, including various lenders, real estate investors and the Mortgage Bankers Association (MBA), have been lobbying the National Association of Insurance Commissioners (NAIC) and others for approval of the MBA form of Evidence of Insurance - Commercial Property for use in commercial loan transactions (the current version of this form is available at http://www.mortgagebankers.org/IndustryResources/ResourceCenters/EvidenceofInsuranceResourceCenter), and the MBA form has been approved for use in a number of jurisdictions and is presently in use by various parties.)  The ACORD 27(2009/12) has typically been used for residential property or small commercial properties, while the ACORD 28 (2011/11) has typically been used for larger commercial properties.  The current ACORD 27 and 28 forms are certificates of insurance designed for delivery to parties that have a financial interest in the property covered by the listed policy or policies.  These parties are typically additional insureds and/or loss payees.

A landlord should always be designated on a tenant’s commercial general liability policy as an “additional insured.”  (Similarly, a property owner should be designated as an additional insured under the general liability policy of a contractor who is working on the property.)  Additional insured status extends liability coverage to the additional insured on the same terms provided to the named insured.  Coverage is limited to the activities of the named insured approved by the insurer.

Again, it is extremely important to note that most insurance certificates are merely provided for informational purposes.  In order to gain the benefits of the certain rights and coverage extensions intended in a lease transaction, the landlord/property owner must ensure that proper endorsements are issued and attached to the underlying policy.

Further, with respect to insurance certificates and policies, a landlord/property owner should confirm/consider the following:

• If a broker is issuing an insurance certificate on behalf of insurers, the broker should be required to evidence its authority to do so;
• The certificate holder and all other interested parties should be properly listed in the certificate and the endorsement to the policy;
• All insurance companies should be shown with current policy numbers and all coverage limitations should be referenced;
• In liability insurance certificates, a waiver of subrogation rights in favor of the additional insured should be noted (which may require an endorsement to the policy);
• The insurance certificate and the underlying insurance policy or policies should state that no act, error or omission of the named insured will adversely affect the landlord’s rights under the policy; and
• All rights set forth in any insurance certificate should be documented in an endorsement attached to the underlying policy, and if the certificate form offered by the tenant contains “for information only” language, the insurer should provide a copy of the actual endorsement that has been made a part of the policy.

Here’s the bottom line with respect to the ACORD 25 (2010/05) Form - Certificate of Liability Insurance, ACORD 27 (2009/12) form - Evidence of Property Insurance, and ACORD 28 (2011/11) form - Evidence of Commercial Property Insurance -- when obtaining any of the forms described in this memo, remember that a certificate is not a contract between the certificate holder and the insurer and that the certificate holder is best protected by obtaining, reviewing (with professional assistance, if appropriate), and accepting the actual policy or policies in question.