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Certificates of Insurance No Longer Adequate

May 25, 2011 Georgia is the latest state to adopt new laws reinforcing that parties should not verify insurance coverage by relying on a Certificate of Insurance (“COI”) issued by an insurance broker. The new law provides that a COI may not modify, amend, or change any of the provisions in the policy. If there is a difference between what is stated in the COI and what is in the policy, the certificate holder is “out of luck.”  The result is certificate holders (such as lenders, landlord, and developers) need to change how they verify insurance coverages.

COI’s are requested in a wide variety of transactions to verify the existence of required insurance coverages. Typical transactions using COI’s include loans, construction contracts, and leases (personal property and real property). The party that is the certificate holder wants to know that the insured has certain insurance coverages in place. For example, a lender (certificate holder) will want to know that its borrower (the insured) has, among other things, insured the collateral and that the insurance policy contains the proper provisions benefitting the lender (for example, the correct “mortgagee” language). Another example is a landlord wanting to know that a tenant is carrying the correct liability coverage and that the landlord is listed as an “additional insured” under its tenant’s policy.

In 2011, the Georgia General Assembly passed HB66, adding new code section O.C.G.A. § 34-24-19.1, dealing specifically with COI’s. The legislation followed the January 2011 issuance of Directive‑11‑EX‑2 by the Georgia Insurance Commissioner. Both the new statute and the Directive provide that a COI issued in Georgia (a) must be in the exact form approved by the Commissioner without added language; (b) cannot modify or amend an insurance policy in any way; and (c) is not a contract and cannot grant the certificate holder any rights. The new statute establishes criminal penalties for violations, and empowers the Commissioner to enact regulations and to punish brokers with fines and licensing penalties.

What this means for lenders, landlords, developers, and others accustomed to requiring a COI is that they must now obtain a certified copy of the full and complete policy, including all endorsements, exclusions, and riders. The policy must then be carefully reviewed to ensure that the correct insurance with adequate limits was obtained, that the entities that are to be listed as additional insureds are in fact insured, and that no exclusions in the policy vitiate the needed coverage. Because a detailed policy review can be time consuming, the process of verifying insurance coverages (i.e., requesting the copy of the insurance policy) should start well before the expected closing date (or the expected start of construction date, or the anticipated signing date, etc.). For loan closings or transactions where new policies will be issued, it is possible to close using an ACORD 75 Insurance Binder, which must be followed by the prompt issuance of the applicable policy to be closely and promptly reviewed by the lender.We are also advising parties who are traditionally certificate holders (e.g., lenders, landlords, developers, etc.) to modify all form documents requiring proof of insurance coverage (e.g., loan agreements, construction contracts, leases, etc.) to require that the other party provide a complete certified copy of all insurance policies.  An example is for a landlord to modify the insurance provision in their standard lease form (including work letters) to require the tenant (and its contractors) to provide a certified copy of insurance policy(ies).

If you have any questions or would like further information on this topic, please contact Bill Berg at 404-467-7509 or bberg@kkgpc.com.