A HOT TIP AND A SOUP SANDWICH
By Arthur E. Pape
On July28, 2006, ACORD[1] published new versions of its ACORD27 (Evidence of Property Insurance) and ACORD28 (Evidence of Commercial Property Insurance) forms. Copies are attached as Appendix A and Appendix B. Prior versions of these forms contained language that conveyed all the rights and privileges contained in the policy and provided an absolute obligation to notify the certificate holder of cancellation of the policy. The new forms for property insurance are like ACORD25 (the CGL Certificate) and ACORD26 (Certificate of Property Insurance) forms that were promulgated some years ago. Each of these four ACORD forms, which are typically used by brokers and their insureds to provide “evidence” that the insured has the insurance coverage identified by the form in effect, now contains the statement that it is issued “as a matter of information only” and “confers no rights upon the additional interest named below” and “does not amend, extend or alter the coverage afforded by the policies” identified in the completed form. Thus, while the titles of the new ACORD 27 and 28 forms still contain the word “Evidence,” the forms cannot be relied on as proof the insurance exists or that an endorsement naming the mortgagee identified in the Evidence as the holder of an additional interest has actually been issued by the insurer.
To make matters worse, the new ACORD 27 and 28 forms also contain the same language as the ACORD25 and ACORD26 forms, stating that if any of the policies described in the certificate is cancelled before the expiration date “the issuing insurer will endeavor to mail” notice to the person identified as having the additional interest specified in the completed form. The number of days notice is blank and must be filled in when the form is completed. Most lenders ask for 30 days prior notice, but under the new language “failure to mail such notice shall impose no obligation or liability of any kind upon the insurer, its agents or representatives.”
Publication of these new forms has aroused the lending industry. The Mortgage Bankers Association strongly objects to the new forms on behalf of its membership and is seeking to have the offensive parts rescinded. At least one insurance consultant who represents many of the major players in the collateralized mortgage backed securities (CMBS) market has stated that he will not close a loan on the basis of the new ACORD forms. I understand that certain rating agencies have downgraded loans in which the new ACORD28 is provided as the evidence of insurance and that other rating agencies have denied investment grade ratings to CMBS loans in those circumstances.
In response to the complaints by the lending industry, ACORD has “organized” a Working Group which meets telephonically for one hour most Wednesday afternoons. The Working Group is comprised of about 45 people representing insurers, agents, lenders and the Mortgage Bankers Association. The purpose of the Working Group is to develop a form of evidence of insurance that will satisfy the objectives and the objections of all parties. Fellow ACREL member, Fred Joseph, and I, since we neither play golf nor have anything else to do on Wednesday afternoons, have been part of the Group. Some thus far insurmountablehurdles include:
(i)If a new policy is required for the project in question, the policy probably does not exist at closing, because it typically takes the insurance industry anywhere from 2weeks to 6months to produce a policy after coverage has been bound. That may be a tough pill to swallow, but thus far, the insurance industry is unwilling or unable to change.
(ii)Binding coverage with a binder like the ACORD75 form of insurance binder (copy attached as Appendix C) is also problematic. Binders do not set forth all of the coverage details that the lender wants to know. Although the binder creates an independent contract for insurance, coverage details may be unknown and the binder has a very limited duration, perhaps 30 to 60days after issuance, at which time the binder expires because it is presumed that the policy will have been issued. As the insurance coverage litigation following after the WorldTradeCenter collapse demonstrated so well, insurance policies for large commercial projects are sometimes non-standard or manuscript policies, which means it will be hard to determine exactly what coverage was bound if aloss occurs before the policy is issued.
(iii)State laws and requirements governing insurance policies vary so greatly that it is difficult to set forth the rights of a holder of the ACORD form of Evidence of Insurance to notice of cancellation. A majority of states and the Insurance Services Organization (ISO) Forms require 10days notice by the insurer if the cancellation is for nonpayment of premiums and 30days notice if the cancellation is for any other reason. These policy provisions automatically apply as part of the ISO form policies if there is a mortgage holder named in the Declarations portion of the policy.
(iv)Another serious defect in the new ACORD27 and 28 forms is that the “endeavor” language of the new ACORD formsdeprives the mortgage holder of the right to notice should the policy be cancelled by the insured. I believe a mortgage holder’s right to notice from the insurer of cancellation by the insured was derived exclusively from the old ACORD27 and 28 which conveyed the rights under the policy and stated that “should the policy be terminated [presumably by either party], the [insurer] will give the [mortgage holder] ______days written notice.” It is important to understand that neither the so-called “New York long form mortgage endorsement” (copy attached as Appendix D) nor any provision of the ISOpolicy appears to require notice to a mortgage holder in the event the insured cancels the policy. Appendix E contains the standard ISO Commercial Property Policy Mortgageholders language that is part of the Additional Coverages built into the Policy, as well as the explanation of the language, which specifically states that “No promise is made to notify the mortgageholder in the event of cancellation at the insured’s request.” The so-called New York long form mortgage holder endorsement (see Appendix D) is not any more helpful. Thus, whenever a mortgage holder receives one of the new ACORD forms, if the mortgage holder wants to require notice from the insurer of an attempted cancellation by the insured borrower, it must obtain this right via an endorsement to the policy.
(v)At this point, the Working Group appears to be a long way from even considering the question of the ability of the mortgage holder to rely on the ACORD28 form. The Working Group has not discussed the ACORD27.
The situation is as easy to handle as a soup sandwich. I intend to solve the dilemma for myself by developing a form for evidence of insurance for use on behalf of my clients instead of accepting the new ACORD forms. The issue will be whether an insurance broker will be prepared to provide the form.
Everyone seems to agree that one may not amend an insurance policy by using an ACORD certificate. Therefore, no matter what the new ACORD certificates say, the policy will govern. If you have a New York endorsement or a standard mortgage holder clause in the policy, it should override a lot of the limitations of the certificate, except for those relating to notice of cancellation by the insurer to the mortgagee or certificate holder. However, one must review the policy to be sure what rights the mortgagee will have. The author has been advised that one major insurance company is now attempting to insert the “endeavor” language into its policies, which signals a need to watch out for that attempt.
Needless to say, certificates of insurance will be a hot topic for some months to come. The publicity and the wrangling should result in more real estate professionals learning more about certificates of insurance in particular and insurance issues generally.
C:\data\pape\acrel\insurance\hot tips-2007\hot tips - acord 28 v5 aep 080307.DOC- 1 -December 5, 2018
[1]Based in New York, with offices in London as well, ACORD Corporation (“ACORD”) is a voluntary membership trade association for the insurance industry.