Magazine article Journal of Property Management

Avoiding Certificate of Insurance Traps

Magazine article Journal of Property Management

Avoiding Certificate of Insurance Traps

Article excerpt

Every institutional asset manager knows that he or she must get a copy of the evidence of insurance required by the lease from every tenant. What most asset and portfolio managers do not know is that this area is a trap for the unwary.

Do you know what kind of evidence of insurance you should be requesting from your tenants? If all you do is check the limits, expiration dates, and carrier strength before filing the forms in the dark recesses of a tenant's file, you may be in for a rude (read: expensive) awakening. But with a simple set of procedures and guidelines, the whole problem can be avoided.

There are many types of evidence of insurance available for property managers/owners, but the type one should request depends on the risk involved. Obviously, if you are leasing space to an explosives manufacturer, nothing less than a certified copy of the tenant's entire policy, with yourself endorsed as an additional insured, will suffice.

The choice of evidence of insurance becomes more hazy in the less risky situations, where asking for a copy of the tenant's entire policy is not feasible. For these sorts of situations, The Agency Company Organization for Research and Development ("ACORD") has developed standard forms to provide evidence of insurance. The most common forms are the ACORD 25 Form and the ACORD 27 Form. Unfortunately, there is much confusion in the industry as to the appropriate use of these forms.

The ACORD 27 Form, "Evidence of Property Insurance," is the stronger of the two. It was initially developed to assure lenders that any claim check issued would be in the name of both the named insured and the mortgagee, loan payee, or additional insured, without having to provide complete copies of the insurance policy. What is important to note however, is that it was intended to cover property insurance. Liability insurance listed on an ACORD 27 Form is inappropriate according to the instructions provided by ACORD.

The ACORD 25 Form, "Certificate of Insurance," is the weaker of the two forms because of two disclaimers: it does not amend or modify the policy and the carrier only needs to "endeavor to" provide notice of policy cancellation. However, it is the appropriate form, according to ACORD instructions, to use when adding an additional insured to a liability policy.

In most leases, tenants are required to provide evidence acceptable to the landlord that they are maintaining property coverage on the tenant improvements and general liability coverage and that the landlord, and others identified by the landlord, are named as additional insureds.

The types of evidence of insurance available in a leasing scenario from strongest to weakest are:

1. A certified copy of both the liability and property policies with endorsements to each listing additional insureds.

2. An uncertified copy of both the liability and property policies with endorsements to each listing additional insureds.

3. An ACORD 27 Form evidencing property coverage for the tenant improvements and an ACORD 25 Form evidencing liability coverage with the words "endeavor to" struck out and initialed by the executing agent, both listing additional insureds. Please note, however, that only agents whom the carrier has delegated binding authority may strike this language on behalf of the carrier.

Both forms should always be accompanied by copies of the actual endorsements to the policies issued by the carrier or else the form is only as strong as the agent who produced it. …

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