On Aug. 31, 1998, Acordia delivered a COI to Senstar Finance. The COI indicated that Centennial was the “insured,” Acordia was the “producer,” and Senstar Finance was the “certificate holder.” This document purported to “certify” that the following policies of insurance had been issued to Centennial for the policy period indicated: (1) commercial general liability insurance from National Union Fire Insurance Co. and (2) “Equipment Floater Blanket 'All Risk'” insurance from Reliance Insurance.

The COI further reflected that “Loss Payee & Additional Insured applies to Certificate Holder [Senstar Finance] as respects attached list of Equipment.” An attached list contained a listing of the equipment that was owned by Senstar Finance and leased to Western Leasing. The list indicated that the “lessee” of the equipment was “Western Leasing, Inc. (Centennial Resources)” and that the “additional insured and loss payee” for the equipment was Senstar Finance.

In explaining the purpose of a COI, Acordia's vice president correctly stated during a deposition that “a [COI] is an agent's warranty to an interested party that there is coverage in force.” On Dec. 1, 1999, Western Leasing sent Acordia an insurance claim on behalf of Senstar Finance for the damage done to the some of the equipment. Acordia responded on December 28, stating that while “our policy provides insurance coverage for these items and the additional interests of [Senstar] and [Western Leasing],” coverage was not available in this case because Centennial's employees “freely admit removing the parts from these items for repairs and rebuilds of other equipment pieces.”

Thereafter, Western Leasing conducted its own investigation over a 10-month period. It concluded that Centennial employees had not “cannibalized” the equipment. On Dec. 22, 2000, Western Leasing sent Acordia another insurance claim on behalf of Senstar Finance. Acordia never submitted either of these claims to Reliance Insurance.

On Jan. 25, 2000, Acordia informed Western Leasing that the Aug. 31, 1998 COI contained several errors. First, the equipment set forth on the list attached to the COI was not actually covered under the policy disclosed on the face of the certificate. According to Acordia, this equipment had been deleted from the policy in February 1998. Centennial had subsequently requested that the equipment be reinstated under the policy, but this never happened. It was also discovered that, contrary to what was reflected on the COI, the policy did not include Senstar as an “additional insured and loss payee.” The COI also was false in its reporting of a “blanket” policy. Rather, the actual policy was a scheduled policy, whereby each piece of equipment needed to be listed on the policy in order to be afforded coverage.

To prevail on any negligence claim, Western Leasing was required three elements: “(1) a duty on the part of the defendant (2) a breach of that duty and (3) consequent injury” (Mullins v. Commonwealth Life Ins. Co., 839 S.W.2d 245, 247 [Ky. 1992]). Citing to cases from foreign jurisdictions, the trial court ruled that Acordia owed no duty of care to Western Leasing's predecessor-in-interest, Senstar Finance, in the production or issuance of the COI. Pursuant to this ruling, any negligent or even reckless conduct on the part of Acordia in setting forth information on the certificate was simply not actionable.

In this case, Acordia conceded that it issued a COI directly to Senstar Finance pursuant to the request of its client, Centennial. Acordia further conceded that the purpose of this certificate was to warrant interested parties that coverage was in force. Acordia clearly knew that Senstar Finance was an interested party and that Senstar Finance intended to utilize the COI for guidance in its business transactions. As a result, the Court of Appeal held that the trial court erred as a matter of law in ruling that Acordia did not have a duty to exercise reasonable care or competence in the communication of information on the COI that it issued directly to Senstar Finance.

Yet, establishing the existence of a duty on the part of Acordia is not sufficient. It was necessary to determine whether there is sufficient evidence to allow a reasonable juror to conclude that Senstar Finance “justifiably relied” on the false information supplied by Acordia. The court concluded that such evidence existed in the record.

In determining whether it was “justifiable” for a plaintiff to rely on information appearing on the face of a COI, the presence of “disclaimer” language on the certificate. Referring to an earlier case that found no justifiable reliance, because a COI did not contain a listing of all exclusions appearing in the policy. Concluding that unlike the facts set forth in the earlier case Western Leasing argued successfully that its case does present such a situation of “conflicting language” between the COI and the actual insurance policy, but rather an affirmative misrepresentation. Concluding as a matter of first impression in Kentucky, whether affirmative misrepresentations on the face of a COI can give rise to a claim of negligent misrepresentation in Kentucky, the court concluded they do give rise to such a claim.

After careful consideration of the case law, both domestic and foreign, and the plain language of section 552 of the Second Restatement of Torts, the Court of Appeal held that affirmative misrepresentations on the face of a COI can give rise to a claim of negligent misrepresentation in Kentucky. The court reasoned:

“If COIs cannot be relied upon for these limited purposes, then they would cease to have any legitimate use whatsoever. In light of this jurisdiction's adoption of the tort of negligent misrepresentation, we cannot sanction the issuance of documents among business professionals purporting to 'certify' information that is affirmatively misrepresented or false. The production of such false information for the guidance of others in their business transactions is specifically actionable as a tort in this jurisdiction where the information is justifiably relied upon by another to his or her detriment.”

Lessons learned

Although it should be obvious, an insurance agent or broker should never issue a COI that contains a false representation. COIs are serious documents on which the recipients rely in entering into many transactions and may be seriously damaged by a false statement in amounts far in excess of the limits of liability of an insurance agent or broker's errors and omissions limits.

The person preparing the COI should be a licensed insurance agent and broker who takes the work seriously and ascertains in his or her professional opinion that the COI accurately represents the policy it certifies. No broker or agent should ever condone or allow a COI to leave the agent or broker's office with false statements as to those insured or the coverages provided. Every COI should be carefully compared with the policy to ascertain that the COI accurate represents the persons insured, the additional insureds, and the coverages provided by the policy. Failure to do so in a jurisdiction like Kentucky will expose the agent or broker to a major E&O claim and litigation that could seek damages in excess of the E&O policy limits. It will also make it difficult or severely expensive to purchase a renewal of the agency or brokerage E&O insurance.