Massachusetts has approved a new chapter to the insurance legislation already on the books. Chapter 175L regulates certificates of insurance for the first time in Massachusetts. The new statute follows the Model Act of the National Council of Insurance Legislators approved by that body in 2012. Enactment of the Model Act nationwide has been a major initiative of the insurance industry since its drafting and approval by the National Council of Insurance Legislators.
Codifies certificate practices to avoid prior court decisions
The purpose of the new Act is to make statutorily clear that insurance certificates do not and cannot modify the terms or conditions of the underlying insurance policies they evidence. Whether Chapter 175L will accomplish the unstated goal of statutorily reversing court decisions finding that insurance certificates create liability for insurance companies and insurance producers outside of the explicit terms of the underlying insurance remains to be seen.
An example of the problem this statute seeks correct is found in Witkowski v. Richard W. Endlar Insurance Agency, the subject of one of the most read articles of Agency Checklist: Court Sinks Endlar Agency over Certificate of Insurance. In Endlar, the Appeals Court found that the insurance certificate issued by an agency that correctly identified the underlying policy and the coverages in general, created a factual issue for trial as to a negligent misrepresentation. The insurance certificate correctly described that the master condominium policy had flood insurance but, not surprisingly, did not identify that the master policy had an explicit exclusion for the particular condominium unit in question. The exclusion was based upon prior flooding of this garden-style condominium located beside a river. When the new owner was flooded out, he learned that he had no coverage and sued the agent. The agent initially prevailed but the Appeals Court reversed the decision stating that the certificate could evidence a negligent misrepresentation based upon the particularity of the exclusion.
The new statute will make such a claim unlikely to succeed in the future when it takes effect on April 7, 2015.
New certificate statute has specific rules for limiting certificate liability
A copy of the new statute can be accessed below, but the terms of the statute in bullet point form are the following:
- A certificate of insurance encompasses any document or instrument evidencing property or casualty insurance coverage issued by an insurer or insurance producer;
- A certificate may not “amend, extend or alter the coverage afforded by the policy it evidences”;
- A certificate cannot create any new or additional rights outside the reference policy;
- The law bars anyone from knowingly preparing, issuing, requesting or requiring any false or misleading information in the certificate;
- Likewise the law prohibits anyone from preparing, issuing, requesting or requiring a certificate that purports to affirmatively or negatively reference insurance outside the coverage provided by the underlying policy;
- A certificate cannot warrant that any insurance or indemnification requirements of a contract are fulfilled by the underlying policy of insurance.
- A cancellation notice reference on the certificate does not create any right to receive notice of cancellation, non-renewal or material changes to a policy unless the terms of the policy or endorsement so provides
Interpretation of the new certificate law must await the courts
While the new certificate law is very specific, the interpretation of these provisions will only become known when the Courts rule on what the Legislature has written. Some of these interpretations may not result in something other than what the drafters of this legislation may have intended.
For example, in Massachusetts we have a very broad business representation statute under General Laws, Chapter 93A § 11. This statute allows suits for unfair and deceptive acts or practices in commerce or trade.
The new statute prohibits in § 3(a) anyone from knowingly preparing or issuing “…a certificate of insurance that contains any false or misleading information concerning the policy of insurance to which the certificate of insurance makes reference…” Since a producer is most likely the persons preparing and issuing a certificate of insurance, if the producer somehow made an error regarding the insurance the certificate recipient would have no rights against the insurance company under the new statute. However, there may be no legal bar to the recipient of the certificate claiming against the producer for negligent misrepresentation.
Whether the courts would apply such negligent misrepresentation, based upon this argument, is an open question under the new statute.
Other open questions for agent takeaway on the new statute
The new statute should work, in general, for a producer’s benefit in allowing them to explicitly counter any requests for additional references in a certificate of insurance that would contradict or extend coverage. Their answer simply has to be that such an act would be against the law.
However, producers representing the customary users of insurance certificates, such as contractors and subcontractors, may well wish to advise their clients of the new statute and that at a minimum these clients may want to establish practice and procedures to verify the following:
- Contractually requiring the production of copies of all insurance policies that are intended to comply with the insurance conditions of an underlying contract.
- Establishing specific procedures that verify the terms of the policies they receive have the provisions relating to the coverage required by contract.
- Establish explicit checklists regarding all of the basic issues regarding the required policy conditions that comply with the contract.
In addition, one of the most important conditions under the new statute that producers should advise their insureds about is the fact that the certificate of insurance provisions relating to cancellation, non-renewal or material endorsements, have no legal validity under the new statute.
The language in the present certificate of insurance does not necessarily create a contractual obligation relating to such notices but the provision of the new statute, M.G.L. c. 175L, relating to such notices is crystal clear. Unless the person or company requesting such notices can show an actual policy condition or endorsement specifying such notices are to be given, they are going to be completely out of luck if they suffer damages as a result on not being notified.
If any lawsuits come to the attention of Agency Checklists relating to the new statute, we will update this article or write a new article.
A copy of the new Chapter 175L is here: Chapter 175L certificate of insurance.