September 3, 2014
On June 28, the Governor signed a new Michigan law addressing the legal effect of certificates of insurance, those commonly-used pieces of paper that you exchange with others to prove that insurance coverage exists. This new law underscores the importance of your contract insurance requirements—and the unreliability of certificates of insurance.
Yes, certificates of insurance are unreliable. Courts have consistently held that you cannot rely on a certificate’s contents as proof that the insurance coverage exists. So your insurance claim will fail if the policy is not in place or does not have the coverage you expected, regardless of what the certificate led you to believe.
Despite their legal unreliability, certificates are routinely exchanged and (mistakenly) relied upon. Which prompts the question: what can you rely on to make sure that others carry the insurance you require of them?
You should begin by reinforcing your contract insurance requirements. That reinforcement should describe the insurance features that matter to you, such as what risks are covered; what are the policy limits; who is insured; who are the additional insureds, if anyone; what are the policy effective dates; etc.
You will also probably need to revise your contract’s insurance requirements regarding notice of nonrenewal or cancellation as the typical contract will violate the new law on this point. Here’s why. The new law prohibits you from requiring a certificate of property or casualty insurance containing terms different from those in the policy. Your contracts, if typical of industry practice, probably require the other party to obtain a policy that will give you notice, say, 30 days before cancellation or nonrenewal. But most policies do not provide for this notice to anyone other than the named insured. If your contract requires such a certificate, your contract will violate the new law.
This is not a hypothetical problem. According to the Senate Fiscal Agency’s analysis of the new law, Michigan Department of Transportation (MDOT) contracts contain exactly this kind of requirement that the new law would ban. Since 2011, roughly 13 other states have adopted similar laws.
After your contract is revised and reinforced, you should require proof of insurance. But now you know that a mere certificate of insurance is no proof at all. And you know that requiring the wrong form of certificate may be a violation itself. Instead, require a communication directly from the insuring company (not the independent agent). The best form of direct communication? A copy of the policy itself, with all endorsements attached.
What about certificates that others require you to deliver? The new law makes you responsible for errors in any certificate you deliver regarding property and casualty insurance. You can be fined up to $500 for each violation ($2,500 if you knowingly violated the law). Are you off the hook if you didn’t prepare the certificate yourself? After all, you never prepare it: your insurance agent does. That difference is irrelevant under the new law. You are still responsible if you deliver the incorrect certificate. Liability attaches to the preparer (your agent) and to the deliverer (you).
What to do? We suggest several things:
• Stop relying on certificates of insurance as proof that the insurance exists. Demand to see a copy of the policy.
• Review your standard contract insurance requirements. Are your requirements adequately specific? Do you require a copy of the policy or other reliable proof of insurance? Or do you require merely a “certificate” of insurance? Would the required certificate violate the new law, especially as to notice of cancellation or nonrenewal? Reinforce your standard requirements as needed.
• Consult your insurance advisor and experienced legal counsel to coordinate your future practices regarding insurance.
For more information, contact your Miller Johnson contract lawyer or Author Attorney Jeff Ammon, Contact