CLIENT ALERT: Seventh Circuit Negates Need for a Certificate of Insurance Before Loss - CGL Coverage Exists for an Additional Insured if an Oral Agreement Prior to Covered Event

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The Seventh Circuit Court of Appeals, in Cincinnati Ins. Co. v. Vita Food Products, Inc., No. 15–1405 (7th Cir. Dec. 16, 2015), has issued an important decision with far-reaching impact on the interpretation of “additional insured” status under commercial general liability (“CGL”) insurance policies. With this decision, additional insureds should have an easier time seeking coverage.

Specifically, the Seventh Circuit has ruled that, where a CGL policy provided the insured with the ability to orally agree with a third party to add it as an additional insured, coverage did not depend on the insurer’s issuance of a certificate of insurance.  Rather, coverage depends on whether the oral agreement had occurred prior to the underlying accident for which coverage was sought.

The appeal was based on the following facts: Painters USA was hired by Vita Food Products, Inc., to provide painting services at Vita’s premises. According to Vita, Painters orally agreed to add Vita as an additional insured to a CGL policy issued to Painters by Cincinnati Insurance Company. Soon after Painters began doing work for Vita and before there was any written confirmation of the alleged oral agreement, one of Painters’ workers [Ovando] allegedly fell while working at Vita. A personal injury suit was filed against Vita on Ovando’s behalf and that of his wife [Baez] alleging negligent maintenance of Vita’s premises. Cincinnati sought a judicial declaration that Vita was not covered by the Painters policy. The insurer argued that the accident, even if it had occurred after an oral agreement that added Vita as a party insured, had occurred before the preparation of the certificate confirming Vita’s status as an additional insured. Cincinnati asserted that Painters had requested the certificate within hours after Ovando’s injury and that an insurance agent for Cincinnati Insurance had issued it to Vita the next day.

The U.S. District Court for the Northern District of Illinois agreed with Cincinnati that the certificate had come too late holding that until the certificate was prepared and signed, the “additional insured” was not actually insured. The district court, therefore, granted summary judgment in favor of the insurance company.

The Seventh Circuit reversed explaining that no permission from Cincinnati was required for the primary insured [Painters] to create an additional insured, provided that the two insureds had a relationship that made the addition of a second insured consistent with the nature and aims of the policy, as when the original insured was providing products or services to the additional insured [as Painters had done vis-à-vis Vita]. Judge Richard A. Posner’s majority opinion found that the reference in the policy to a certificate of insurance was “ambiguous.” In the circuit court’s view, it could be regarded (1) as a prerequisite to coverage of the additional insured; (2) as intended merely to memorialize the oral agreement, in which event the date of the certificate would not matter; or (3) as something that had to memorialize the oral agreement in writing before the insured could file a claim.

The Seventh Circuit rejected the district court’s conclusion that coverage was extended only “where a certificate has been issued,” stating that that was “not what the policy” said. The oral agreement had to precede the accident that gave rise to the insured’s claim, it found, but it added that there was “no indication of when the certificate of insurance [had] to be issued.” The circuit court was not persuaded by Cincinnati’s argument that requiring the certificate before a liability-triggering event occurred was necessary to protect the insurer against fakery by the insured. It pointed out that the certificate was not issued by Painters or Vita but by an insurance agent on behalf of Cincinnati, adding that the agent “would not be willing to backdate a certificate of insurance at the insured’s [Painters’] request.” It then pointed out that “[o]ral agreements are valid contracts…and the insurance policy is explicit that an oral agreement is sufficient to add an additional insured.”

Finally, the Seventh Circuit noted, the certificate of insurance was “not a contract,” but a document that stated that it was “issued as a matter of information only,” that it conferred “no rights upon the certificate holder,” that it did “not affirmatively or negatively amend, extend or alter the coverage afforded by the policies,” and that it did “not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder.” The certificate of insurance, the circuit court declared, was not a “precondition to anything” but, rather, was “just information.” Based on these conclusions, the Seventh Circuit determined that if Vita could prove that there was an oral agreement to add it as an additional insured prior to the accident to Ovando, Vita would be entitled to coverage under Cincinnati’s policy.

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