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May 28, 2014

Insurance Certificates - Are You Covered?

A common requirement for loan closings is the production of proof of insurance. A borrower is frequently asked to provide proof of various insurance coverages (in amounts which the lender deems adequate). Such insurance coverages are often required to be extended to the lender. For example, liability insurance can be required to cover a lender as an "additional insured." Casualty insurance can be required to cover a lender as a "loss payee" or "mortgagee." Where the lending relation is ongoing, the lender may also require notification of any cancellation (usually 30 days prior notice, but some insurance companies will provide shorter notice periods, sometimes as short as 10 days).

Many parties provide proof of liability insurance in the form of a certificate, insurance binder or policy. If in the form of a certificate (usually an ACORD 25 in New York) the certificate should be signed by an insurance company representative, and show the date of the certificate, correct legal name and address of the insured, type of coverage, property covered, issuing insurance company, amount of insurance and expiration date of insurance. The certificate should also state that the lender is entitled to rely on the certificate by stating that "the certificate holder is an additional insured."

That being said, a certificate of insurance does not establish that the insurance referenced in it actually provides the necessary coverage; only the policy itself governs coverage, and any representations on the certificate of insurance as to the scope or existence of coverage are generally unenforceable. Consequently, most certificates will specifically state that no protection is afforded to the certificate holder without a formal endorsement to the underlying insurance policy. In such case, the certificate is "for informational purposes only," and a lender would not be entitled to rely on such insurance coverage without an actual endorsement to the underlying policy.

The certificate may also contain notice provisions to the holder, which provides that the insurer will "endeavor" to mail the certificate holder prior written notice of cancellation. Over the past few years, this provision has turned into a "courtesy" clause, since the language now provides that there is no obligation on the insurer to actually mail such notice, and failure to so mail imposes no liability or obligation on the insurer. It is sometimes possible to revise such clause to remove the "endeavor," but it is almost always impossible to remove the "no liability or obligation" language.

If proof of insurance is provided by binder or policy, it is still important to verify the insurance above-described information. In addition to the basic insurance information, the policy should specifically state that the lender is named as an "additional insured," "loss payee," "mortgagee" or other appropriate status, and that notice of cancellation will be provided in accordance with the terms of such binder or policy.

If you require further information or assistance regarding the information presented in this Legal Alert and its impact on your organization, please contact Roger F. Cominsky at (716) 566-1413 or rcominsky@hblaw.com.

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