Understanding Fraudulent Certificates of Insurance and Their Legal Implications

According to Kirk Buffington, NIGP-CPP, CPPO, C.P.M., CPFIM, MBA, the misuse of technology has significantly escalated the issue of Fraudulent Certificates of Insurance (COI). "Given the ease of use of Photoshop and Artificial Intelligence (AI), fraudulent certificates are on the rise," he explains. This trend is echoed in alarming data from TransUnion (Information Technology Company), which reported a staggering 150% increase in insurance fraud between Q2 2021 and Q2 2022. The growing sophistication of fraud underscores the urgent need for improved safeguards and education around COIs.

What Are Fraudulent Certificates of Insurance?

Certificates of Insurance (COIs) are NOT actual insurance contracts but serve as summaries of an insured’s coverage that are used to satisfy the contract requirements. Despite their intended role as convenient documentation, fraudulent certificates—ranging from altered documents to completely fabricated ones—are increasingly misused. These misleading documents fail to accurately reflect policyholder coverage or meet contractual requirements, often leading certificate holders to mistakenly believe they are fully protected.

The Legal Repercussions of Misleading Certificates

"Misrepresentations of the actual insurance coverage in place on certificates of insurance are pervasive in some types of businesses," explains David J. Dybdahl, CPCU, ARM, MBA, CIC, president of American Risk Management Resources Network, LLC. Dybdahl highlights the serious professional risks faced by those issuing certificates, stating, "The person issuing the certificate of insurance takes on potential professional errors and omissions risks when a certificate of insurance materially misrepresents the actual insurance coverage in force, and the certificate holder suffers an uncovered loss that would have been covered by the represented coverage on the certificate of insurance."

He underscores the heightened responsibilities involved, particularly in construction contracts. "The standard of care is elevated for the issuer of the certificate of insurance when there are specific insurance requirements in a contract and a specific format that the certificate of insurance must have," Dybdahl explains. This is especially critical when contractors must designate stakeholders as additional insureds on liability policies and affirm this status in the certificates issued. Such oversights not only challenge professional standards but also put projects and relationships at substantial risk.

One notable case highlighting the necessity for COIs to accurately represent contract requirements is Penn Outdoor Services LLC v. Harleysville Insurance Company of New Jersey and Wharton, Lyon & Lyon. In this case, the Pennsylvania Superior Court emphasized that COIs must be meticulously detailed and aligned with the specific insurance requirements outlined in contracts to avoid any ambiguity or misinterpretation. The court ruled that the COI provided by the broker did not accurately reflect the actual insurance coverage, leading to significant misunderstandings and unanticipated risks.

Similarly, the case of T-Mobile USA v. Selective Insurance Company of America illustrates the legal principle that insurers are bound by the representations made in COIs, even if they contain disclaimers. The Washington Supreme Court's ruling reinforced that COIs should not only serve as informational documents but also act as binding assurances that the coverage aligns with contractual obligations.

Responsibility for Errors on COIs

Determining who is responsible for errors on COIs is crucial for ensuring accountability and protecting the interests of all parties involved. In Marlin v. Wetzel County Board of Education (2002), the West Virginia Court of Appeals found that the insurer was not liable for errors made by the agent on the COI because there was no evidence that the insurer had reviewed or approved the information provided by the licensed insurance agent. This case highlights the importance of ensuring that both licensed insurance agents and insurers are diligent in verifying the accuracy of COIs.

On the other hand, cases where insurers were found responsible for errors on COIs underscore the legal accountability of insurers for the actions of their licensed insurance agents. For instance, in Sumitomo Insurance Co. v. Southern Guaranty Insurance Co. (2004), the court ruled that the insurer was liable for the misrepresentations made by its licensed insurance agent on the COI, emphasizing the insurer's responsibility for the accuracy of the information provided.

Why Is This Issue Prevalent?

Several factors contribute to the prevalence of fraudulent certificates of insurance and misrepresentation in the industry:

1. Lack of Understanding: Many licensed insurance agents and certificate holders DO NOT fully understand the limitations of COIs. Miscommunication often leads to certificate holders believing they have broader coverage than they actually do.

2. Pressure to Close Deals: Contractors and agents sometimes feel compelled to provide certificates that align with contractual demands, even if the actual coverage falls short. This can lead to intentional or unintentional misrepresentation.

3. Complex Insurance Policies: Summarizing large, complex insurance policies into a one-page certificate inevitably leaves room for inaccuracies and omissions.

4. Weak Verification Practices: Many recipients fail to verify the authenticity of the COI with the insurance carrier or review the underlying policy documents.

Impact on Owners, Businesses and Agencies

This growing problem has far-reaching consequences for property owners, businesses, and insurance agencies:

• Financial Risks: Businesses relying on fraudulent COIs face significant out-of-pocket expenses when claims are denied. For example, uncovered damages for accidents or project delays can result in substantial losses.
• Legal Challenges: Agencies that knowingly misrepresent coverage on certificates are vulnerable to E&O lawsuits and regulatory penalties.
• Reputational Damage: Both insurance providers and contractors experience reputational harm when disputes over fraudulent COIs arise, impacting their ability to retain clients and secure future contracts.

Best Practices to Avoid Fraudulent Certificates

Avoiding the pitfalls of fraudulent and misleading certificates requires proactive measures by all parties involved.

For Licensed Insurance Agencies:

1. Ensure Accuracy: Always ensure COIs accurately reflect the contractual terms, coverage, and limitations of the policy.
2. Educate Staff: Provide training for agents and brokers on COI practices, emphasizing the legal and ethical standards of issuing certificates.
3. Use Specific Endorsements: Where applicable, use detailed endorsements like ISO’s CG 20 10 and CG 20 37 for general liability policies, which address additional insured needs with clarity.  These documents should be used in construction contracts and are published by the Insurance Services Office, Inc. (ISO).
4. Verify Details: Double-check endorsements and additional insured provisions to ensure compliance with contractual requirements.
5. Avoid Misleading Language: Clearly state the limitations of COIs and avoid creating false expectations about coverage.

For Owners, Businesses and Certificate Holders:

1. Be Persistent
   It’s common to face extreme delays or resistance from some insurance carriers when requesting accurate COIs that reflect contract requirements. Stay firm and follow up consistently to ensure changes are made.

2. Verify Policies
   Confirm that the coverage listed on the COI matches the contract requirements and the actual policies in place. Send a copy of the contract, including insurance requirements, to the carrier using both email and trackable mail for accountability.

3. Request Full Documentation
   Always review the complete insurance policy, endorsements, and declarations to verify that all necessary coverages are included.

4. Add Additional Insured Status
   Ensure you are listed as an additional insured on the policy when required. Keep in mind that being labeled as a “certificate holder” alone provides no actual coverage.

5. Engage Independent Advisors
   If possible, work with a risk manager or independent advisor to review and verify policy compliance. They can provide expert guidance and ensure you’re adequately protected.

Moving Toward Transparency

Fraudulent certificates of insurance are not just a contractual nuisance; they are a systemic failure that requires industry-wide reforms. Improved communication, education, and verification processes will foster greater accountability among all stakeholders.

Businesses, agencies, and policyholders must work together to build trust and streamline insurance documentation. By prioritizing accuracy and transparency, the industry can reduce the costly consequences of fraudulent and misleading certificates while protecting all parties from unnecessary risks.

Accurate documentation is not merely a best practice—it is a fundamental requirement for ethical and legally sound operations in today’s insurance landscape.