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June 2012

Fortuity Reaffirmed: Retro-Dated Certificate of Insurance

A recurring theme in insurance coverage disputes in Florida is the effect of a certificate of insurance that contradicts policy language.  Generally, Florida courts hold that a certificate of insurance cannot extend coverage beyond that provided by a policy, but there may be an exception to the general rule for certificates issued by agents of the insurer.  A recent case from the Florida First District of Appeals, Interstate Fire & Casualty Co. v. Abernathy, 2012 Fla. App. LEXIS 8278, reaffirmed the general rule on public policy grounds.  Avoiding insurer insolvency was a cornerstone for the court’s decision.  In Abernathy, the Court refused to base coverage on a certificate of insurance issued four days after a loss, finding that it would violate public policy to allow insurance coverage for a non-fortuitous event. 

Generally, a certificate of insurance is insufficient to extend coverage, especially when, as is usually the case, the certificate itself states that it “is issued as a matter of information only . . . [and] does not amend, extend or alter the coverage afforded by the Policy below.”  See Boseman v. Connecticut General Life Ins. Co., 302 U.S. 196, 203 (1937) (general rule is that a certificate of insurance “is not part of the contract of, or necessary, to the insurance”).  Plaintiffs seeking to establish coverage, however, routinely argue that the issuer of the certificate acted as the insurer’s agent in preparing the certificate of insurance, and that the agent’s actions bind the insurer, whether or not the certificate contradicts the policy language. See National Union Fire Insurance Company v. Liberty Mutual Insurance Company, 2008 U.S. Dist. Lexis 14291 (S.D. Fla. 2008) (applying Florida law).  The argument regarding agency is generally sufficient to at least create a factual question that prevents summary judgment. 

In Abernathy, a school club, the Choctaw Club, conducted a fundraiser it called the Jelly Fish Festival. The claimant, a minor student, allegedly suffered serious injuries immediately after exiting an inflatable bungee run.  The Club did not have liability insurance coverage, and had made no application, request or agreement for such insurance coverage.  The bungee run operator was, however, insured under a liability insurance policy which included as an insured, any person or organization required to be an additional insured under written contract.  The operator had no written contract with the Club, nor did the Club have any agreement concerning liability insurance, written or oral, with the operator or its insurer.  That should have been the end of the story with respect to coverage for the Club. 

However, two days after the incident, a representative of the Club contacted the operator, and requested a certificate of insurance naming the Club as an additional insured under the operator’s policy.  The operator contacted its insurance broker and the broker prepared and faxed to the Club a form certificate of insurance on April 18, 2007, which stated that the certificate “CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER” but also stated that the Club “is named as additional insured” for “[o]perations at Jelly Fish Festival on 4/13/07 to 4/14/07.”

The minor claimant filed suit against the operator, the Club, and the manufacturer of the bungee run.  The insurer undertook the defense of the operator, but denied an obligation to defend or indemnify the Club.  The Club and claimant subsequently entered into a settlement agreement under which the Club consented to entry of judgment for $6.25 million, the Club assigned its rights under the policy, and the claimant agreed not to execute the judgment against the Club.  The trial court eventually entered summary judgment against the insurer, finding that the insurance broker had authority to issue a binding certificate of insurance.  The insurer appealed.

The Florida First District Court of Appeal declined to address the issue of the broker’s authority, and focused on the fact that the certificate of insurance was issued four days after loss, after the operator and the Club already had notice of the incident and its potential liability.  The Court concluded that, if the certificate of insurance was construed as an agreement to pay a loss already incurred, it would be contrary to the important public policy embodying principles of fortuity and known loss, which preclude coverage for losses that have already taken place.  The Court pointed out the devastating effect on insurer reserves if there were coverage for non-fortuitous losses, i.e., losses already known by an insured prior to the time coverage commences.  The court reasoned that: “The rule forbidding ‘insuring against’ known losses is part and parcel of the public policy to protect other policy holders against insolvent insurers.  An agreement to assume a known loss is not insurance.”  The Court reversed the lower court’s summary judgment against the insurer and directed the lower court to enter judgment in the insurer’s favor on all claims related to the Club.

The Abernathy case is valuable to any insurer facing the possibility of a coverage determination founded solely on a certificate of insurance and demonstrates that arguments based on the public policy need to preserve insurer solvency can resonate with Florida’s appellate courts.

Jose I. Leon