Certificates of Insurance:
Not Worth the Paper They’re Written On

Patrick J. Dyer

            If your company routinely relies on certificates of insurance as proof of coverage,  one word of advice–Stop!  In a recent legal opinion, the Houston Court of Appeals stated quite clearly that you have no right to rely on such a certificate, even if the insurance agent assures you of its accuracy and promises you that you are in fact covered.  The only way to protect yourself is to get a copy of the actual insurance policy and the endorsements and read them.

            Owners frequently require contractors to provide proof that the owner is covered under the contractor’s general liability insurance policy as an “additional insured.”  Contractors, in turn, frequently require their subcontractors to provide the same proof.  As an “additional insured,” the owner or general contractor receives the benefit of additional insurance coverage in the event of a claim.  The coverage is usually obtained by adding an endorsement to the insurance policy or by amending the policy.  In common practice, however, the parties frequently rely on a “certificate of insurance,” a sheet of  paper that tells you that you are in fact covered, for what and for how much.  The problem is that the certificate is worthless.  If the actual insurance policy has not been changed or endorsed to add you as an additional insured, you are not an additional insured. 

            Here’s what happened in Brown & Brown of Texas, Inc. v. Omni Metals, No. 01-05-01190-CV, 2009 Tex. App. Lexis 2065 (Tex. App.–Houston [1st Dist.] March 20, 2008).  Omni Metals buys and sells steel coils.   Port Metal Processing stored Omni’s steel, processed it, and temporarily stored the finished product in its warehouse.  Port Metal wanted to insure its warehouse, inventory, and the goods it stored for its customers.  Omni also wanted insurance to cover its goods as an additional insured under Port Metal’s policy. 

            Port Metal specifically asked its insurance agent for a policy that would cover not only Port Metal and its inventory but the goods it stored for its customers, including Omni.  When Port Metal got the policy, however, the company president read it and noticed that it contained an exclusion for property held in storage and property for which a storage fee was charged.  Port Metal charged its customers a storage fee, so it looked to the president like the policy was not what he had wanted.  The president asked the insurance agent about the exclusion and was told it did not apply.  According to the agent, the exclusion applied only to property that was not related to Port Metal’s business, so Port Metal and Omni were covered.  Port Metal accepted the policy and renewed it a number of times over the years.

            Omni periodically asked Port Metal if Omni’s goods were covered.  In addition, Omni’s bank required Omni to get a certificate of insurance proving coverage.  Each time, Port Metal’s insurance agent would provide a certificate either specifically stating the policy covered stored property of others or that it covered all risks, which the agent represented would also cover Omni’s goods.  The certificate also contained the typical disclaimer that the certificate was provided for information only and did not have the effect of changing the policy. 
            Port Metal’s warehouse burned down, and Omni lost $2.6 million worth of steel.  The insurance company denied Omni’s claim on the ground that the policy did not cover goods for which a storage fee was charged.  Omni sued for negligent misrepresentation and deceptive trade practices and ultimately obtained a substantial jury verdict against both the insurance company and the insurance agent.  The First Court of Appeals in Houston reversed the judgment and held that Omni was not entitled to anything.  According to the court, because Omni was not a party to the insurance policy, Omni was not entitled to rely on any statements made to Port Metal or on the certificates of insurance.  The actual insurance policy was never changed so Omni was never covered.

            The decision is significant.  It holds that as a matter of law a non-party has no right to rely on oral or written statements concerning the existence and scope of insurance coverage.  A certificate of insurance is therefore worthless.  It cannot change the insurance policy itself, so it cannot furnish the basis for a claim under the policy.  But it also cannot furnish the basis for a claim of negligent misrepresentation.  No prior case had gone that far.  A motion for rehearing has been filed in the case, so it is possible that the court could change its mind, or alternatively, the case could go all the way to the Texas Supreme Court.  For the time being, however, the moral of the story is clear: If you want to make sure you are covered, read the insurance policy.  It does not matter what an insurance agent or a certificate of insurance says. 

June 14, 2008