Verbal OK Found Good Enough For Coverage

The 7th U.S. Circuit Court of Appeals, construing Illinois law, recently held that a policy provision requiring issuance of a certificate of insurance for additional insured status did not necessarily mean that the certificate had to issue before the occurrence giving rise to the additional insured’s claim for coverage.

The insurer in Cincinnati Insurance Co. v. Vita Food Products, 2015 U.S. App. Lexis 21878 (7th Cir., Dec. 16, 2015), was represented by Litchfield, Cavo LLP. Much, Shelist P.C. represented the additional insured, Vita Food Products.

Cincinnati issued a commercial general liability policy to Painters USA in 2011. The policy permitted Painters to name an additional insured under the policy by oral agreement, so long as the agreement preceded the occurrence and “a certificate of insurance showing that person or organization as an additional insured has been issued.”

While the policy was in force, Painters was hired by Vita to do painting on Vita’s premises and orally agreed to add Vita as an additional insured. Soon after the work began, one of Painters’ employees was injured and sued Vita for negligent maintenance of the premises.

It was only after the injury that Painters requested a Cincinnati agent to issue a certificate of insurance showing Vita as an additional insured. The agent issued the certificate within a day.

Vita tendered to Cincinnati, which denied coverage and Cincinnati thereafter brought this declaratory action for a determination that it owed no coverage to Vita. The U.S. District Court granted summary judgment in favor of Cincinnati; Vita filed this appeal.

Analysis

In an opinion by Judge Richard A. Posner, the 7th Circuit reversed. He pointed out that conflicting evidence existed whether the oral agreement to add Vita was entered into before or after the accident, so that summary judgment would not have been appropriate on that issue. But Cincinnati maintained that it was still entitled to summary judgment because no fact issue existed concerning the fact that the certificate of insurance did not issue until after the accident.

Posner disagreed. He said that the policy clearly required that the oral agreement have been entered into prior to the accident. The policy was not, however, explicit as to when the certificate had to be issued. Thus, the policy could be construed as requiring the certificate merely to memorialize the agreement, in which case the date of issuance would not matter. Another possibility was that the certificate had to be issued only before the insured could file a claim.

Posner thus found the policy ambiguous and noted the rule typically requiring ambiguous policy provisions to be construed against the insurer as the drafter of the policy.

Cincinnati nonetheless argued that the purpose of requiring the certificate was to help protect the insurer against fakery by the insured, and Posner agreed that it could. Cincinnati further contended that the certificate served as a precondition to coverage for Vita.

Posner observed that the policy explicitly provided that oral agreements were a sufficient basis for adding an additional insured. The certificate of insurance, moreover, was not an agreement and, by its own terms, stated that it did not confer rights or extend or alter coverage.

If the certificate was a precondition to the extension of additional insured coverage, as Cincinnati claimed, then it would, in fact, have the effect of altering the rights of the parties. Given the language on the certificate, Posner said it could not be construed as a precondition: It simply constituted information.

Consequently, if Vita could prove that an oral agreement to name it as an additional insured was entered into prior to the accident, Vita would be entitled to coverage, regardless of the fact that the certificate of insurance was issued later.

The court, therefore, reversed the summary judgment in favor of Cincinnati and remanded for further proceedings.

Key Point

A policy requiring that an insured’s oral agreement to name an additional insured take place before the accident triggering coverage – and requiring issuance of a certificate of insurance reflecting the additional insured status – will not be construed as requiring the issuance of the certificate prior to the accident.