Binders, Evidences of Insurance or Certificates of Insurance … Who Does What to Whom?
By Irene Morrill, CPCU, CIC, ARM, CRM, LIA, CRIS, CPIW
I recently received an email question regarding what to provide to a mortgagee for a closing. The answer, of course, depends on the exact type of transaction, but let’s look at the INTENT behind each of these ACORD forms.
If you or your agency is NOT a member of ACORD receiving information on ALL the possible forms, then you should sign up ASAP. If you only want pdf copies to keep current, then membership is FREE! What a deal. Each month you receive an update of form changes. You can download a pdf copy of the updated form and directions for completion of the form.
Binder (ACORD Form 75)
The current edition is 2010. On the directions for completion ACORD provides some important tips. The ACORD tips are in blue and my comments are in black.
- A Binder is a temporary insurance contract which provides coverage in advance of the issuance of an insurance policy. (The purpose of a binder is for use when a policy doesn’t currently exist or a renewal has not been issued as yet and proof of insurance is desired.)
- The improper use of binders has become a major cause of producer’s Errors and Omissions claims. It is imperative that only authorized people prepare them. Preparation must be complete and accurate. (A person must have knowledge of carrier binding authority regarding location, limits, coverages, etc. Not only does stating something on a binder that cannot be found in the policy create a potential E&O exposure, it is also against the law. The MA Division of Insurance has cautioned us NOT to imply coverage that CANNOT be found IN the policy as MA is a file … APPROVE … and use state. You can find the DOI Bulletin 2011-07 on our MAIA website.)
- All binders must conform to the state insurance code for the state in which the subject of insurance is located. (We don’t have any specific regulation in MA regarding a binder completion, but remember the DOI reminder of previous paragraph. MA does have a law requiring a bank to accept a binder:
183:65 Acceptance of written memorandum as evidence of insurance Section 65.
Any mortgagee doing business in the commonwealth who makes in excess of five mortgage loans per year shall accept a written memorandum of a preliminary contract of insurance pursuant to section ninety-eight of chapter one hundred and seventy-five as evidence of insurance from any duly licensed agent, broker or insurance company; provided, however, that a contract for insurance for a term of not less than one year is issued within thirty days of said memorandum, or in the event of the cancellation of said memorandum, the mortgagee shall be provided with prior written notification thereof.
- The maximum and/or minimum term of a binder may be governed by state statute and/or company underwriting instructions. (There is no MA regulation or law stating how long or short a binder should be. There is only the above law that requires a bank must ACCEPT one for 30 days.)
- At the end of the binder’s specified term, all coverage expires unless a new binder has been issued or the expired binder has been replaced with a policy. (As agents we MUST keep track of the binders that we issue. If the policy has not been issued by the end of the binder term, then the agent must extend the term, assuming the company has accepted the risk. We must also be aware that a company can CANCEL coverage issued under a binder if the proper cancellation times have been observed.
- The language in the binder must be precise. Do not use vague or all-encompassing terms which may imply coverages not intended, such as “All Risk.” If possible, use the same language and terminology that will appear on policy. (Overstating or misstating policy language can result in E&O claims as well as sanction from the MA DOI. Again, we are a file/approve/use state. If the agent modifies the policy it must be filed for approval before use.)
- An agent may only issue binders which comply with the company’s underwriting instructions (per company manual, agency agreement, correspondence and/or company underwriter). If the authority is not in writing, the agent should obtain written authority. (This suggestion coincides with ACORD’s warning about E&O situations above. If you don’t know what you are doing … DON’T DO IT!)
- Most agency agreements contain stated “time frames” within which the company must be notified of any risk bound. (It’s a potential E&O creator if the company doesn’t receive the bound risk in a timely Yes, you might have binding authority … but someone needs to review the agency/ company contract. A binder sent/uploaded two weeks AFTER the purchase/closing might NOT be acceptable. The agency is now on the hook for coverage.)
There are some other helpful tips but you can go to ACORD and read the additional information.
The binder itself states:
THIS BINDER IS A TEMPORARY INSURANCE CONTRACT, SUBJECT TO THE CONDITIONS SHOWN ON THE REVERSE SIDE OF THIS FORM.
The conditions on the back state:
This Company binds the kind(s) of insurance stipulated on the reverse side. The Insurance is subject to the terms, conditions and limitations of the policy(ies) in current use by the Company.
This binder may be cancelled by the Insured by surrender of this binder or by written notice to the Company stating when cancellation will be effective. This binder may be cancelled by the Company by notice to the Insured in accordance with the policy conditions. This binder is cancelled when replaced by a policy. If this binder is not replaced by a policy, the Company is entitled to charge a premium for the binder according to the Rules and Rates in use by the Company.
The form reminds us that whatever policy language applies is what the insured has and we should NOT be typing anything on the front that conflicts with policy language such as … “100% replacement cost” or “guaranteed replacement cost” or any other tidbit of information that the potential bank or potential loss payee has asked you to mention. Remember the MA DOI has told us NOT to type anything on a binder, certificate or evidence of insurance that is NOT in the POLICY as approved.
The binder can be used for property, auto, or any liability coverages as proof that coverage has been provided for a short duration which will hopefully be replaced by an actual insurance policy. Beware just as a policy CAN BE CANCELLED … so can a binder.
Evidences of Insurance
There are two options. ACORD Form 27 Evidence of Insurance is designed for personal lines or small commercial risks. ACORD Form 28 Evidence of Commercial Property is specifically designed for larger commercial risks when more information is desired by the receiving entity.
Why was the evidence created?
This “evidence” of an existing policy was designed for mortgagees or other loss payee situations as proof of an existing policy.
Evidence of Property ACORD Form 27(current edition 2009)
In the Evidence of Property direction for completion ACORD states:
ACORD 27, Evidence of Property Insurance, provides information about coverages currently in force on a policy.
Research reveals that information included on the form satisfies requirements of mortgagees in most situations. Discussions with various lenders indicate that inclusion of items such as coinsurance are not important with respect to Personal Lines policies or small commercial policies. The primary concern is that the amount of insurance is sufficient to cover the amount of the loan. Sufficient space is provided in the Coverage and Remarks sections of the form to include any additional information that may be required.
The title of the form, ACORD 27, Evidence of Property Insurance, provides a coverage statement for mortgagees and loss payees who provide mortgages or loans on residential property, personal property or small commercial properties, and are named in the policy.
So, where a policy already exists and there is a change or addition in mortgagee or loss payee, this is the “appropriate form.”
However, if the bank or mortgage company checklist for closing requests a binder, then this form could be confusing to them and hold up the closing.
It’s interesting the ACORD 75 Binder does NOT expressly state the cancellation procedure on the front of the form. Yet, on the back, it does mention that the binder can be cancelled “by notice to the insured.” It does NOT mention notice to the mortgagee, though WE know that, since it is stated on the back that the binder is issued “subject to the terms and conditions of the policy in current use by the Company,” the appropriate notice would be sent to the mortgagee or loss payee where policy terms dictate.
However, the Evidence of Property ACORD 27 has a cancellation provision on the front of the form. The language of the current Evidence cancellation provision is causing GREAT concern with some mortgage companies and/or loss payees. The 2009 ACORD 27 states:
SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE EXPIRATION DATE THEREOF, NOTICE WILL BE DELIVERED IN ACCORDANCE WITH THE POLICY PROVISIONS.
This is essentially what the binder says … but the lending industry is NOT happy!
The 2009 ACORD 27 Evidence of Property Insurance also states at the top:
THIS EVIDENCE OF PROPERTY INSURANCE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE ADDITIONAL INTEREST NAMED BELOW. THIS EVIDENCE DOES NOT AFFIRMATIVELY OR NEGATIVELY AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW. THIS EVIDENCE OF INSURANCE DOES NOT CONSTITUTE A CONTRACT BETWEEN THE ISSUING INSURER(S), AUTHORIZED REPRESENTATIVE OR PRODUCER, AND THE ADDITIONAL INTEREST.
And in the middle:
THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED. NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS EVIDENCE OF PROPERTY INSURANCE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAIMS.
Both of these statements are essentially what the conditions on the back of the binder state, but again, the lending industry is not thrilled with this language.
Evidence of Commercial Property ACORD 28(current edition 2009)
This contains the same information as the ACORD 27 Evidence of Property but also additional information to the receiver such as whether coverage exists for business income, terrorism, ordinance or law, flood, coinsurance, etc.
The ACORD 28 Evidence of Commercial Property description of completion states:
The title of the form, ACORD 28, Evidence of Commercial Property Insurance, provides a coverage statement for mortgagees, additional insureds and loss payees who provide mortgages or loans on real property or business personal property insured under a Commercial Lines policy, and are named in the policy.
Insurance coverage on large commercial property can have many variables. Coverages, coinsurance percentages, deductibles and other details can vary widely and are important considerations to mortgagees and other lenders. In addition, The Terrorism Risk Insurance Act and the recent increase in exposure to mold and fungus losses have resulted in a greater need to know more about the specific terms of the insurance contract. ACORD 28 provides check boxes and pre-printed text to communicate important insurance details. The intent is to minimize follow-up conversations and correspondence with respect to information that is required in most cases involving large commercial real estate.
The ACORD 28 Evidence of Commercial Property provides information about coverages currently in force on a policy.
I have “heard” and read that some lenders are requiring the OLDER edition of the evidences of property or commercial property because the form cancellation provision states the old “endeavor to notify” and the disclaimer that they are NOT a party to the contract is not mentioned (but is STILL TRUE!)
ACORD reminds us NOT to use older versions of their forms. ACORD also reminds us to ask the company WHAT version of the ACORD form they want used.
Again, the lending industry might feel more comfortable with the binder … heaven knows why!
Certificates of Insurance
Last, but by no means least, is the certificate of insurance. There are two – a property certificate and a liability certificate.
When is the property certificate used? When the receiver does not and will not have any insurable inte-rest in the property.
In the description of use for ACORD 24 Certificate of Property Insurance it is stated:
Certificate of Property Insurance vs. Evidence of Property Insurance:
An important distinction exists between the Certificate of Property Insurance (ACORD 24) and the Evi-dence of Property Insurance (ACORD 27) or the Evidence of Commercial Property Insurance (ACORD 28).
If the receiver of the form wants to verify that property coverage exists on a policy and has no direct interest in the policy, use ACORD 24, Certificate of Property Insurance. However, if the receiver of the form does have a verifiable insurable interest in the policy, such as a mortgagee or a lender, use ACORD 27, Evidence of Property Insurance, when the property is insured under a Personal Lines or small Com-mercial policy. When the property is insured under a Commercial Lines policy with a large limit and the lender requires specific detailed coverage information, use ACORD 28, Evidence of Commercial Property Insurance.
So the Certificate of Property ACORD 24 would not be used for a “closing” on a commercial or residential property UNLESS it is for a condominium unit-owner and the commercial agent for the master policy is showing that there is a commercial policy in force for the condominium association. Since we DON’T add individual unit-owner mortgagees to the commercial master association policy, a certificate of pro-perty insurance is the correct ACORD form.
ACORD also states in its ACORD Form 24 description of completion:
Purpose of the Certificate of Insurance
The purpose of the Certificate of Insurance has been the topic of frequent discussions throughout the industry. Attention centers around the true purpose of a certificate and the rights, if any, it conveys to a certificate holder. This is particularly important when the difference between a certificate holder and lien holder, loss payee, or mortgagee is considered.
In a 1974 court decision (United States Pipe & Foundry Co. v United States Fidelity & Guar. Co, 505 F. 2d 88 (5th Cir. 1974), the court ruled that a certificate is not a contract between the holder and the insurer. It only provides information to an interested third party that insurance is in force at the time of issuance. The court also stated: “The provision regarding notification in the event of cancellation is a mere pro-mise, unsupported by any consideration.“ Although some companies provide notice of cancellation to certificate holders, they are not obliged to do so, since the holder is not a party to the contract.
The Certificate of Property Insurance is used for most property situations in which the insured has requested certification to a third party of issued property coverages. The uses of this Certificate can include parties involved in condominium association agreements, lessor/lessee agreements, or other areas of certification. The ACORD Certificate should be issued only in compliance with company instructions.
ACORD recommends that the Certificate NOT be used in the following situations:
- To satisfy a mortgagee or lienholder (ACORD 27, Evidence of Property Insurance or ACORD 28, Evidence of Commercial Property Insurance should be used for this) (Evidence form designed for receiving entities with insurable interest in the property described.)
- To provide information to the owner of a leased motor vehicle or the lender about both liability and physical damage coverages applying to the vehicle (ACORD 23, Automobile Certificate of Insurance, should be used for this)
- To quote wording from a contract (an ACORD form is NOT the place to type contractual language)
- To waive rights (An ACORD form is NOT the place to waive one‘s rights of subrogation or any other rights -- that is what contracts are for)
- To attach to an endorsement (An ACORD form is NOT an endorsement or part of the policy for that matter. If an entity needs to be added to a policy as mortgagee or additional insured, that is a SEPARATE PROCESS.)
- To quote any wording which amends a policy unless the policy itself has been amended.
PS … the MA DOI agrees with this statement since YOU don’t have a legal right to just “change” the policy wording as filed by the insurance company!
The ACORD 25 Certificate of Liability is used to show to another entity that various liability coverage(s) exist for a certain entity.
ACORD states in the description of completion for the ACORD 25 Certificate of Liability :
If the receiver of the form wants to verify that liability coverage exists on a policy and has no direct interest in the policy, use the certificate of insurance. However, if the receiver of the form does have a verifiable interest in the policy, such as an additional insured, the liability policy must be amended by endorsement, to provide the appropriate coverage for the interested party prior to issuing a certificate of insurance (since the certificate confers no rights upon the holder and does not amend the policy).
If you have made the receiver an additional insured … ACORD reminds you to ENDORSE THE POLICY!!
So … When Proving Insurance Exists to a Mortgagee ...
The binder was designed for the situations when NO CURRENT POLICY EXISTS and the receiver is going to have an insurable interest in the property
The Evidence of Insurance was designed when there currently IS a policy in existence and the receiver is going to have an insurable interest in the property.
The Certificate of Property or Liability was designed as proof of insurance to another party. Generally there is no insurable interest involved. However, in liability situations such as contractor/developer, general contractor/sub-contractor and other business arrangements where the receiver WANTS to be added to the policy as additional insured, ACORD reminds us that the certificate grants them NO interests or rights and that an endorsement to the policy is NECESSARY to provide “insured status” to the receiver.
As usual, if I can be of service to you, please call me, Irene Morrill, Vice President of Technical Affairs at 800.870.7091 or … BETTER YET …. email me at firstname.lastname@example.org.