The 2012 Virginia General Assembly has passed a law that impacts the issuance of certificates of insurance. The law will be effective on July 1, 2012.
The law was advocated by the insurance industry and addresses an issue that insurance agents face with their customers. The problem lies in the conflict between requirements in contracts and the coverages provided by a contractor’s insurance policy. These exist in both the public and private sector.
A typical example is where a contractor requests his insurance agent to issue a certificate of insurance to show compliance with a government agency’s invitation to bid on a contract. If the insurance requirements in the contract conflict with language of the insurance policy, the certificate of insurance showing compliance is ineffective. In some cases these differences can be resolved by amending the language of the insurance policy.
However there are examples where the contractual language is in direct conflict with the insurance policy. A good example is when one requests additional insured status under a workers’ compensation policy.
When the insurance agent points out the problems with the insurance requirements of the contract to his/her client, the client may not try to correct the issue. Rather they may simply go to another insurance agent who issues a certificate of insurance with incorrect information.
The conscientious agent loses an account and the less scrupulous agent adds a new customer.
When the insurance industry complained to the Virginia Bureau of Insurance of this practice, the response was that under current law they could take no action. The new law (38.2-518) addresses this concern.
Local governments can and should continue including insurance requirements in their contracts. However care needs to be taken to ensure that the insurance policies actually provide the coverages required in the procurement.
The procurement documents should require the bidding contractor to demonstrate that their insurance policies comply with the terms of the procurement. If there are provisions of the requirements that go beyond the policy language, those amendments to the coverage need to be stated by an endorsement issued by the insurance company.
For example, additional insured status can be requested under a general liability policy. However that status should not be noted on the certificate of insurance. The additional insured status should be noted by a separate insurance company issued endorsement.
This new law gives the State Corporation Commission enforcement powers. Those powers extend to both the insurance agent and the requestor of the certificate. 38.2-200 outlines the general powers of the State Corporation Commission. 38.2-218-222 outlines the penalties and enforcement of those penalties. 38.2-218 includes the provision for penalties up to $5,000 for willful violations. Unintentional violations have a $1,000 maximum penalty with a $10,000 annual aggregate.
Guidelines are available on the VML Insurance Programs (VMLIP) web site for members to utilize in stating insurance requirements in a contract. VMLIP members may also contact their underwriter for additional information at (800) 963-6800.
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