One of the most daunting—and often reviled—tasks facing agenciestoday involves the processing of certificates of insurance. This isan activity that typically generates no revenue for the agency butcreates significant operational costs and dramatically heightensthe agency's E&O exposure.

One consultant estimates the cost to issue a plain-vanilla ACORD25 document at $7; and if some customization is required, it couldbe as much as $15-18. This figure could go even higher whenresponding to requests that insist upon the completion of some sortof “compliance checklist” that consists of dozens of broad, vague,generalized questions about policy coverages.

For example, an agent was given a multipage questionnaire he wasrequired to complete, along with an “affidavit” warranting thatcoverage was in place and conformed to the construction contract(of which he had read two of 88 pages) that was to be notarized andwitnessed by a disinterested third party and sent to thecertificate holder via certified mail. This document required thatover 400 entries be completed.

These affidavits and checklists often want the agent to proclaimthat the insurance policy(ies) are in compliance with indemnityagreements the insured has entered into—when the reality is thatthey almost never do.

One producer and a customer-service representative (CSR) spenttwo and a half hours on one certificate that had to be redone fourtimes. The last time was because a field on the form was notapplicable, and the CSR had entered “NA”—but the certificate holderwould only accept an entry of “N.A.” So they had to reissue thecertificate and add the two periods after the “N” and “A.” Thecontractor was due $300,000 on a job, and the GC refused to payuntil the certificate met expectations to the letter (or, better,punctuation mark).

Another agent estimates that 3 percent of the firm'scommercial-lines revenue went to pay for certificate operationslast year. That's a big chunk of agency profit being invested in anactivity being provided to third parties virtually free of charge.The agent estimates the cost of issuing certificates is double thecost just three years ago due to the increase in, and complexityof, requests.

Unlike insurers that can increase premiums when expenses rise,agents have no way of passing along these costs unless they can(and are willing to) charge a fee for this service. If they chargea fee, they open a potential E&O exposure in that a fee mightbe construed as consideration, creating a contract out of thecertificate that might be actionable against the agent. And thereality is that fees are not legally an option in many, if notmost, states.

For many agencies, certificates have become a costly black holethat takes valuable time away from servicing customers whilecreating unnecessary expense for the agency. Essentially, theagency is providing a free service to a party (the certificateholder) with which it has no business relationship. Somecertificate holders appear to view insurance agencies likegovernment agencies that offer public services to which they'reentitled.

In addition to operational costs, certificates createsignificant E&O costs. From not being a blip on the radarscreen of E&O carriers just a few years ago, today as much as15 percent of all commercial-lines E&O claims can be attributedto certificates of insurance and/or additional-insured issues.Consider three recent E&O claims:

• The insured requested an additional-insured endorsement asrequired by the construction contract, but the agent failed toobtain it. The claim was settled for $180,000. (At least threeindependent studies indicate that 40-50 percent of all certificatesthat indicate additional insured status are incorrect.)
• In another claim, an agent used a blanket additional-insuredendorsement. However, it required that AI status requests arisefrom written contracts. There was no written contract, so theblanket AI endorsement was not triggered. The cost to settle?$445,000.
• In the third and last example, an account was nonrenewed, andthe agent could not find another market. The insured found anE&S carrier, but the carrier couldn't or wouldn't issuecertificates of insurance. As a favor to his former client, theagent used the firm's agency-management system to issue 4,000certificates. As it turned out, the coverage was not actually inforce. Following several accidents, including a fatality, anE&O lawsuit was filed. Settlement cost: $10,290,000.

At the moment, there is a trial court case proceeding involvinga flood loss where the certificate of insurance allegedly indicatedmore flood-insurance coverage than was actually provided. Theamount at stake is $150 million.

The costs associated with certificates of insurance are nottrivial, whether you're considering operational expenses orpotential E&O claims. To learn more about risk managing yourcertificates-of-insurance exposure, visit the Big “I” VirtualUniversity's free Certificate Resource Center at www.iiaba.net/VU.

This article appears in the Aug. 15 edition of NationalUnderwriter P&C.