Common Pitfalls of Certificates of Insurance in Real EstateReal Estate Influence
May 14, 2012 — 1,026 views
Most real estate transactions require parties to produce certificates of insurance. These certificates testify to the existence of a variety of insurance policies, including evidence of property insurance or liability insurance. Many realtors also have a group of contractors that they recommend to clients on a regular basis. For their own protection, realtors should also obtain certificates of insurance from the contractors that they recommend.
ACORD is a non-profit association affiliated with the insurance industry. ACORD supplies the forms used by brokers and agents when their clients need to provide proof of insurance. Unfortunately, ACORD certificates provide limited security and protection. According to a case tried by the Fifth Circuit Court of Appeals in the United States (U.S. Pipe & Foundry Co. vs. U.S. Fidelity & Guar. Co.), the insurer has no duty to give the holder of the certificate information about a policy cancellation. This remains true even if the certificate states that the insurance company will give notice of cancellation.
Unfortunately, certificate holders have minimal rights concerning the named holder of the policy. If a party in a real estate transaction cancels an insurance policy, for instance, then the realtor is not entitled to communication from the insurance company and cannot hold the insurance company liable. Many experts recommend that realtors require ACORD Form 27 or 28, which bears the title “evidence” of property or commercial property insurance, respectively. However, ACORD points out that these evidence certificates are still issued as information only; the word “evidence” is simply a term preferred by the lending community.
For self-protection, attorneys recommend that realtors clearly state their interest in the insurance policy in all transaction documents. Realtors should also ask insurance agents to attach copies of important policy provisions. Alternatively, realtors and their attorneys can provide an altered form of ACORD 27 that clearly states that the certificate is part of the policy and that it confers an interest in the policy. Any agent issuing a certificate should certify that they have the authority to request modification to the certificate.
Certificates of insurance from ACORD, in essence, provide a snapshot of a person’s insurance profile. However, that snapshot may or may not remain stable. Continue to obtain certificates as part of your real estate transaction portfolio. Just keep in mind that they provide you with limited protection and recourse.