Challenges of Managing Certificates of Insurance in Real Estate
Managing certificates of insurance represents a big challenge for real estate and property management organizations. When property changes hands, for example, there can be a lapse in coverage, and that can mean a big risk for the new owner or manager.
“Insurance is one of the primary mechanisms for managing a property owner's downside risk,” says Marc Cook, senior managing director of client services at Crossman & Co. “These documents provide evidence that tenants and vendors have proper insurance coverages in place, and in sufficient amounts, to financially protect themselves, the property owner, and other applicable parties if an incident should occur which causes harm or loss to a guest at the property.”
These are some of the top challenges involved in managing COIs in real estate.
Acquisitions and Management
When a property changes hands or new management takes over, it’s easy to lose track of COIs. Buyers must make sure that upon acquiring the property, the tenants have furnished new certificates of insurance showing that each tenant has the coverages that are required under their lease, says Randy Rush, a lawyer at Winderweedle, Haines, Ward & Woodman.
The same would be true for a property manager taking over the management of a property. According to Kallol Paul, General Manager for Ebix's Risk Management division, "Insurance requirements contained in real estate lease agreements tend to have a larger degree of variation than requirements contained in other types of agreements because lease terms tend to get negotiated more than other types of agreements."
The best way to track these COIs is to establish a process that checks all the parties involved in an acquisition or change in management. “Landlords and property managers must set up a system to ensure that they have received the required certificates of insurance,” Rush says. “Once they’re received, they’re reviewed for sufficiency. Follow-through is critical in this area, as many times it requires more than one attempt to get the certificate corrected.”
It’s important to review the certificates of insurance to make sure that all the required information is set out on the certificate. According to Rush, some of that information will include:
- That the tenant has the required coverages.
- That the policies are in force.
- That the insurance companies meet the requirements of the lease as to financial strength.
- That the landlord, the landlord’s mortgagee and, if required by the lease, the landlord’s property manager are all named as additional insureds.
- That the landlord and landlord’s mortgagee are named as additional loss payees on the property and casualty policy.
“Although most commercial leases will require that the tenant maintain specific insurance policies, many landlords neglect to request copies of the certificates annually and only request the certificate at the time of initial move-in,” says Flavia Berys, a real estate lawyer and broker. “Best practices include implementing a calendar or other system to track certificate expiration so that tenants can be asked to submit evidence of their new policies and renewals."
Understanding Your Rights
Finally, it’s important to realize that simply being named as an additional insured on a certificate of liability insurance actually affords the certificate holder no rights, Rush says. “The only way to be named as an additional insured on the liability policy is for the policy to be endorsed to name a party as an additional insured,” he says. While some liability policies contain an endorsement that provides automatic endorsement to a required additional insured through a blanket additional insured endorsement, you should require an endorsement naming the landlord and the landlord’s mortgagee as additional insureds.
Keeping track of COIs is vital for reducing risk, as even a short gap can cause problems. “A landlord must make sure that tenants have the required coverages in place at all times without a gap in coverage, as it is too late to rectify that omission after a loss occurs,” Rush says.