The Illusion of a Certificate of Insurance
by William J. Augello, Esq.
April 5, 1924 - November 19, 2006
Editorial Note: A certificate of insurance is NOT an insurance policy, and does not serve to provide, endorse, amend, extend or alter in any way the terms of an insurance policy. Only an endorsement, rider or amendment to the policy can effect changes in coverage.
The entire transportation community relies on motor carrier certificates of insurance, including shippers, brokers and freight forwarders. State regulatory agencies also rely on these certificates as evidence of carrier insurance. But no one appears to understand insurance certificates are illusory, as they have two fatal flaws:
1. A certificate of insurance does not disclose exclusions in the policy that it purports to cover.
2. The insurance agent that issues the certificate of insurance only endeavors to notify the certificate holder of a cancellation or a modification of the policy, with no legal liability for failure to do so.
These two flaws result in unrecoverable losses when brokers, 3PLs and shippers rely on insurance certificates without doing more than filing them in their carrier files.
Exclusions from coverage usually encompass whatever happened to cause the loss. For example, "water damage caused by rain, sleet or snow" was excluded in a carrier’s policy without the carrier’s knowledge (and the insurer automatically presumed the water damage was from one of these sources). In another example, a frozen food carrier's policy excluded "mechanical breakdown of the refrigeration unit". Why did that carrier pay premiums for a policy that excluded the principal cause of its losses?
Nevertheless, transportation contracts historically require the carrier to present a certificate of insurance without demanding that the carrier furnish a copy of the cargo policy, or at least a copy of the portion of the policy that states what is covered and what is not covered.
With respect to disclaimers on these certificates, there are two:
1. "This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policy listed below."
2. "Cancellation: Should any of the above described policies be cancelled before the expiration date thereof, the issuing company will endeavor to mail XX days written notice to the below named certificate holder, but failure to mail such notice shall impose no obligation or liability of any kind upon the company."
Editorial Note: As a result of changes to certificates, common diclaimer language has changed to read "Cancellation: Should any of the above described policies be cancelled before the expiration date thereof, notice will be delivered in accordance with the policy provisions."
Why then are these insurance certificates so widely used and accepted as proof that insurance is covering the goods being transported by the carrier? I first began reporting about these defects in the book "Transportation Insurance in Plain English" and have continued to warn the transportation community ever since. Nevertheless, few firms have modified their practices.
What can be done about these defects? Parties that are relying on cargo insurance coverage must include in their contracts a requirement that the carrier produce a copy of that portion of their policy that states what is covered and what is not covered.
In addition, you must insist on receiving a written agreement from the issuer of the certificate that they will give notice of cancellation or modification within a stated period, and that the issuer of the certificate will be liable for the consequences of their failure to do so.
In a tight equipment and insurance market, however, there will probably be resistance to these demands, and you may need to find other carriers that are willing to produce the requested information.
The bottom line is that brokers, 3PLs and shippers who rest assured because they have insurance certificates on file and believe they need not worry about their cargo being covered should start worrying if they do not exercise due diligence and go beyond the certificate!
Every trucking company file must be kept current with any information received, and it should be reviewed on a regular basis for changes. Using a service such as Carrier411 can help brokers monitor many different types of information about motor carriers, including compliance and safety, and be notified of changes.
Special Reference Note: See Appendix 10 in Transportation, Logistics and the Law for a list of 93 exclusions that this writer discovered in "All Risk" cargo policies. Then refer to Appendix 11 for a copy of a standard certificate of insurance, which reveals the name of the insurer, types of coverage, effective and expiration dates, amounts of coverage and deductibles.
About the Author
William J. Augello passed away on the morning of November 19, 2006 at his home in Marana, AZ. Bill was diagnosed earlier in the fall with an aggressive form of neuroendocrine cancer. Bill's fascination with the law and his desire to share it with others continued throughout his illness virtually until the day of his passing.
Mr. Augello attended the Academy of Advanced Traffic in New York after receiving a degree in Psychology at Dartmouth College. He then obtained his law degree at Fordham University while working at his family-owned transportation consulting firm. He is "Of Counsel" to his former firm, Augello, Pezold & Hirschmann, P.C. of Huntington, NY and was Executive Director of the Transportation Consumer Protection Council, Inc. for 30 years, and is now Founding Director. He continues to provide legal advice and expert testimony on transportation matters.
Mr. Augello has been recognized and honored by Syracuse University (Harry E. Saltzberg Honorary Medallion), the Delta Nu Alpha Transportation Fraternity (Transportation Man of the Year), Transportation Lawyers Association (Distinguished Service Award), Colorado Transportation Community's Operation Stimulus (Outstanding Educator of the Year) and by the Shippers National Freight Claim Council, Inc. (Past Presidents’ Award). He formerly served as a member of the faculty and Board of Directors of Denver University’s Intermodal Transportation Institute, and is a coordinator of transportation programs at the National Law Center for Inter-American Free Trade. He is a member of the Board of Directors of the Institute of Logistical Management and is currently the Executive Director/General Counsel of the Freight Transportation Consultants Association. He is listed in Who's Who in America and Who's Who in American Law.
Mr. Augello devoted his career to studying, teaching and writing transportation law subjects for transportation professionals, attorneys, students and paralegals. Transportation, Logistics and the Law (Second Edition) is his 16th text, probably his most comprehensive. It is frequently linked to Freight Claims in Plain English (Third Edition) for readers desiring to conduct more in-depth research on a freight claim or carrier liability problem.