N.Y., Mass. Adopt Certificates of Insurance Law

New York and Massachusetts in January became the latest states to enact laws to prohibit improper use of certificates of insurance.

On Jan. 28, New York Gov. Andrew Cuomo signed into law a bill (A.9590/S.6545-A) that would standardize the practice of using the certificates of insurance. The new law is based on a draft national bill by the National Conference of Insurance Legislators (NCOIL) and was modified to meet the insurance laws in the New York state.

“The new law quite simply standardizes the practice of certificates of insurance, and requires that the certificates reflect only the coverages present in the underlying policies,” said Matthew Guilbault, director of government and industry affairs for the Professional Insurance Agents of New York (PIANY). PIANY has been leading the campaign over several years, joined by associations and industry groups in the insurance, construction and legal trades to regulate and standardize the use of certificate forms.

The law addresses a growing problem for construction and insurance businesses, where certificates of insurance are issued that may not accurately represent policy coverages, according to PIANY.

Guilbault said the new law would prohibit anyone from requesting or requiring that the certificate add language that does not reflect the coverages in the underlying policy.

“The way it will benefit agents and brokers is that the certificates of insurance have been used as a vehicle to try to add coverages and terms that are not inherent in the underlying policy. And that has created a problem for agents and brokers,” said Guilbault. “So by restricting that practice and requiring that the certificates accurately reflect the underlying policies by law, it greatly enhances the confidence that everyone will have in the information contained within the certificate.”

Guilbault noted that the New York Department of Financial Services has previously issued a number of advisory opinions saying that the certificates should not inaccurately describe the underlying policy, but he added that there was no insurance law provision that specifically precluded people from engaging in this practice. “And this is exactly what the new law does. It sets out a new section of law that requires the certificates to be accurate,” he said.

Guilbault said PIANY has been working on this issue for a number of years. “Last year, we were successful in having the bill drafted and introduced and it passed in both the Senate and the Assembly and was sent to the governor,” he said. But the governor vetoed the bill last year because he felt it didn’t adequately deal with state agencies and didn’t allow them to continue to use their certificate forms.

“We then modified the bill this year, re-passed it in both the Senate and the Assembly, allowed state agencies to continue to use their own certificate forms, so long as they remain accurate and reviewed by the insurance department,” said Guilbault. “We are happy to say that we were able to commit the governor to sign the bill into law.”

The law is scheduled to go into effect in mid-February after the legislature makes a chapter amendment and adopts a minor change to the bill’s language. (The governor’s office has requested that the bill leave out its mention of a standardizing body, the Association for Cooperative Operations Research and Development (ACORD), and instead refer to it generically in discussing the certificate forms, according to PIANY.)

There are now close to 25 states around the country that have adopted laws to prohibit the improper use of certificates of insurance, said Guilbault. “We will continue to work on the other half of the states,” he said.

And in Massachusetts, a certificates of insurance bill (S.B.2402) was signed into law on Jan. 7 by then-Gov. Deval Patrick before he left office. The bill is scheduled to take effect on April 7.

“The new law has three key elements relative to certificates of insurance,” said Daniel Foley, vice president of government affairs and general counsel at Massachusetts Association of Insurance Agents (MAIA), an agency association that has actively supported the bill. The bill was based on an NCOIL model act on certificates of insurance, he said.

The first key element deals with the subject of restrictions on the issuance of certificates.”What the bill does is, it prohibits any person from preparing or issuing a certificate of insurance that contains false or misleading information concerning the underlying policy, one that purports to alter, amend or extend coverage of a policy,” said Foley. “A certificate is only a snapshot, a summary of what the actual policy covers. And it can’t be used to extend or alter or amend any type of coverage that the policy doesn’t cover.”

The second key element is that this bill now applies to third parties, said Foley. He explained that a lot of times, the agents’ clients could be subcontractors or small business owners who need to get a certificate of insurance because they are going to bid on a job with a general contractor or bid on a state job.

But a lot of times, these third parties — such as general contractors looking to hire subcontractors — request that information be put on a certificate of insurance that is beyond what the policy actually covers. Banks or mortgage companies can also make unreasonable requests to loan applicants when asking for certificates of insurance, said Foley.

Some third parties might request that they be added as a named insured, which they can’t do because the contract of insurance is between the insurance carrier and the insured, he said. Some might also request a longer period for a policy cancellation than what is allowed in the policy.

“So that if an agent complied with that request, they would be putting down on a certificate false or misleading information that the actual policy does not cover,” he said.

And up until this point, Massachusetts Division of Insurance had jurisdiction over licensed insurance agents and companies. “But the problem was that the Division of Insurance never had any authority over so-called third parties who make these unreasonable requests,” said Foley.

“So this new law allows the Division of Insurance to go after people or third parties who make these requests, and it allows commissioner to issue cease and desist orders,” he said. “It actually allows the commissioner to issue fines of up to $500 per violation of any of the provisions of the law. So we hope that this part of the law will at least eliminate or reduce requests for these improper or misleading certificates.”

And the third key element of the law confirms that the certificate is distinct from an insurance policy, and it codifies the principle that a certificate does not alter, amend or extend an insurance coverage or independently confer rights on any party requesting such a certificate. “So, any certificate that is issued in violation of the provisions of this new law would be considered null and void,” said Foley.

 

February 2, 2015

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