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Insurance Notices of Termination: Will You Find Out Coverage Ends?

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A recent change in a common risk-management activity poses new risks to your firm and its bottom line. Although the change may represent just more paperwork to some, new language in standard insurance forms regarding notices of termination affects all of construction. It's important, and it could cost you big money, no matter what kind of company you operate.

Construction contracts often contain a provision that requires a contractor working on behalf of another contractor or an owner to hold harmless and indemnify the other parties—that is, the contractor or owner. To assure sufficient assets are available to back an indemnity, it is common for the general contractor or owner to contractually require the subcontractor to provide a certificate of insurance. That certificate provides evidence the subcontractor has appropriate insurance coverage.

In September 2009, the Association of Cooperative Operations Research and Development (ACORD), which issues standardized forms for insurance coverage, introduced changes to eight of its certificate-of-insurance forms, including ACORD 25. The new version changed the old notices of cancellations' language, which provided a good-faith attempt—not a promise or the ability to actually notify certificate holders—by the insurer to notify a certificate holder of an insurance policy's cancellation. The new version states an insurance policy's notice of cancellation will be delivered only in accordance with the policy.

However, there are currently no provisions written into liability insurance policies to notify certificate holders about early termination.

If you are a general contractor, it could mean a potential lack of coverage at the time of a loss caused by a subcontractor. That's a risk, especially if the general contractor was banking on the additional insured coverage to transfer risk.

If you're a subcontractor and no provision exists in your insurance policy to provide advance notice to third parties, then insurance brokers or agents can't say on the certificate that you will provide it. If no provision for cancellation is provided in the certificate, then you may be out of compliance with the construction contract and in breach of contract.

The Need To Be Notified

General contractors have a legitimate need to be notified if the contracted party's insurance terminates before the natural expiration date. With advance notice, general contractors can make arrangements to ensure the coverage provided by the additional insured status continues. But without an ability to be notified, the general contractor increases the risk the sub won't be insured when a loss comes.

The certificate of insurance is intended to be a “snapshot” of the insurance policy. The rule of thumb is that if an item is in the policy, it can be evidenced on the certificate. Some parties to a construction insurance policy may try to modify the certificate of insurance as a means to ensure notice of policy cancellation, even though that language does not exist in the policy. But any statement in a certificate of insurance that amends or extends coverage may violate state law.

Since the new language in ACORD 25 states that an insurance policy's notice of cancellation will be delivered only in accordance with the policy provisions, you have decisions to make if you retain subcontractors who have provided you a certificate of insurance. The insurance carrier is not obligated to tell you about a cancellation, so your firm will need to work with subcontractors and their insurance carriers to work out a new solution regarding notification.

Among carriers, the approach to addressing this issue varies. They have developed different proprietary forms to add a policy provision that outlines how third parties will be notified when a policy ends before the natural expiration date. This tactic makes it an imperative to fully read and understand how the form will meet the insurance requirements of the construction contract. The umbrella carriers and the excess- and surplus-line markets are slow to respond with notice-of-cancellation language.

The ACORD 25 change puts a new risk in risk management. I strongly advise vetting the implication of these changes by risk managers with counsel from agents or brokers. 

Michael Campo is senior vice president and construction team leader for Lockton Cos. and can be reached at mcampo@lockton.com.

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