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Providing Proof of Insurance Coverage to Lenders

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Bill Wilson

Abstract
Some lenders are refusing to accept the current editions of the ACORD 27 and 28 and insist that agents issue the 2003 editions of these forms. There are several reasons why agents cannot and should not do this. In this article, we'll examine those reasons. Included is a "one-pager" you can give to your insureds and their lenders to explain why you can't comply with this request.


Background

On July 28, 2006, the ACORD 27 - Evidence of Property Insurance and ACORD 28 - Evidence of Commercial Property Insurance were released. Both forms were revised as required by vote of the ACORD Forms Standards Subcommittee. The forms now track the ACORD 24 - Certificate of Property Insurance form by saying they don't change the terms and conditions of the policy and the "will endeavor" language with regard to notice of cancellation is now included.
In particular, this is the disclaimer language that changed:
2003 ACORD 27 and 28:
"THIS IS EVIDENCE THAT INSURANCE AS IDENTIFIED BELOW HAS BEEN ISSUED, IS IN FORCE, AND CONVEYS ALL THE RIGHTS AND PRIVILEGES AFFORDED UNDER THE POLICY."
2006 ACORD 27 and 28:
"THIS EVIDENCE OF PROPERTY INSURANCE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE ADDITIONAL INTEREST NAMED BELOW. THIS EVIDENCE OF PROPERTY INSURANCE DOES NOT AMEND, EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW."
This information was provided in the August 11, 2006 edition of the Big “I” Virtual University VUpoint newsletter.

Freddie Mac

On November 2, 2006, Freddie Mac announced that it found the current ACORD 28 (2006/07) form unacceptable based on changes made to the form in July. Effective immediately, Freddie Mac said it will require either the 2003 ACORD 28 (2003/10) form, an ACORD 75 insurance binder, or a duplicate original insurance policy as evidence of insurance.

Mortgage Bankers Association

The Mortgage Bankers Association, various lenders, and investors raised concerns following the changes made by ACORD to the Evidence of Insurance forms in July:
"MBA concurs with Freddie Mac's conclusions that the revised ACORD 28 form is not substantive evidence of commercial property insurance and that lenders are not protected by the revised cancellation notification requirements,” said Gail Davis Cardwell, senior vice president of commercial/multifamily at MBA. “MBA strongly advocates notification of policy cancellations to all insureds cited on the insurance policy and provision of substantive and legally binding evidence of insurance to these same parties to promote timely and transparent insurance information on commercial properties.”

Other Lenders

Several national lenders such as Prudential Financial and GE Financial followed suit and began insisting on the 2003 edition of the ACORD 27 and 28 forms. Most of these carriers will not accept an application of insurance as evidence except for flood insurance, nor will they accept a 2006 edition of the ACORD 27 and 28. In other words, some lenders take a Shakespearean view that the 2006 edition of either the ACORD 27 or 28 "...is a tale told by an idiot, full of sound and fury, signifying nothing.”

Insurance Industry Position

Lenders petitioned ACORD to address their problems with the 2006 ACORD 27 and 28 so an ACORD Working Group consisting of insurance and lending industry representatives began holding weekly web-based conference calls in early 2007 in an effort to reach a consensus on this issue. After close to two years of deliberations, the groups met an impasse and these meetings were terminated at least temporarily.
The insurance industry takes the position that the 2003 edition of the ACORD 27 and 28 cannot and should not be provided to lenders based on the following premises and reasons:
  1. The ACORD 27 and 28 forms were never meant to imply that they extended ANY policy rights to lenders or anyone else and that the belief that they did was a misconception by the lending community. For example, each 2003 form said that it "CONVEYS ALL THE RIGHTS AND PRIVILEGES AFFORDED UNDER THE POLICY."

    If no rights are afforded under the policy (e.g., windstorm coverage was inadvertently not provided or the mortgagee was left off), then no rights could have been conveyed by the ACORD forms. The 2006 edition of these forms simply clarifies that intent. Just as ISO revises policy language after courts find coverage where none was intended to exist, these ACORD forms were revised to clarify that they do not extend policy rights.
  2. Under every state insurance law in the country that we're aware of, policy rights can only be extended by policies and binders. If a document such as an ACORD 27 or 28 purports to provide coverage not provided by the policy, then it is attempting to be a policy form itself. Policy forms have to be filed with state insurance departments. Even in states that require certificates and evidences of insurance to be filed, they are not filed as policy forms.
  3. The policies themselves usually state that they cannot be altered to provide coverage or rights except by a written endorsement issued by the insurer. For example, the ISO commercial package policy Common Conditions form IL 00 17 (as well as ISO's BOP policy) says, "This policy contains all the agreements between you and us concerning the insurance afforded...This policy's terms can be amended or waived only by endorsement issued by us and made a part of this policy."
  4. ACORD's licensing agreement says that, if a new edition of an ACORD form is released, the prior edition can only be used for one year following the issuance of the new form. This is to give automation vendors time to update their systems with the new form. Once that has taken place, under the licensing agreement entered into with ACORD by the vendor, which is binding on the agency, the prior edition can no longer be used. This is yet another reason why agents cannot comply with lender requests to issue the 2003 edition of the ACORD 27 and 28.
In response to lender pressure and to explain why agents cannot provide the 2003 editions of the ACORD 27 and 28 forms, IIABA published and distributed the following one-pager that members can give to insureds and lenders:

Possible Solutions

  1. Accept the 2006 edition of the ACORD 27 and 28 backed up by copies of the policies when available. If the information provided is inaccurate, lenders would need to rely on existing unfair trade practices laws, fraud laws, or the legal concept of detrimental reliance to pursue actions against agents and insurers? This would be backed up by mortgageholders E&O insurance.
  2. Work with the insurance industry to jointly develop a hybrid binder (ACORD 75) that provides a contractual basis for legal recourse due to erroneous information while providing the policy detail of the ACORD 27 and 28 necessary to meet the needs of loan documents. Only a policy or a binder can extend policy rights, so the only viable solution if the policy is not yet available but coverage has been bound by the agent or insurer is to issue a binder.

    The problem lenders have with binders is that they are usually issued on a short-term basis. Lenders were advised to keep in mind that many policies permit an insurer to cancel for any reason in the first 60 days of a policy. Therefore, even if the lender had a policy in hand effectively on the date of the loan closing, coverage and terms may be no more permanent than a 60-day binder.

    Lenders seem to be more concerned about renewals because usually if a policy is renewed, the insurer can then cancel only for very limited reasons. This is an issue where the lending and insurance industry would need to negotiate terms that work for both parties.
  3. Lenders need to impress upon borrowers the importance of initiating the insurance process as soon as possible in order to minimize delays in providing policy forms.
  4. Insurers need to improve the delivery of policy forms. With exceptions for large, complex risks, there is no excuse for it taking months to provide policy forms after coverage hs been bound.
Note:  December 2009 editions of the ACORD 27 and 28 were released the last week in January 2010. The new edition removes the cancellation notice provision in these and the ACORD 20, 21, 22, and 23 certificate forms so they track with the September 2009 editions of the ACORD 24 and 25 certificate forms.
Notice of ACORD form changes can be found here with details on exactly what changes were made:
http://www.acord.org/standards/forms/Pages/FormsNotifications.aspx
A complete index of current ACORD forms can be found here:
http://www.acord.org/standards/forms/Documents/forms_index.pdf
If you have any questions about this document or related issues, email bill.wilson@iiaba.net.
Last Updated:  February 12, 2010

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Revised: February 2012