Take My Word For It: Insurer Bound by Insured’s Oral Promise

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It is rare that insurance coverage is provided based on an oral agreement. However, the Court of Appeals for the Seventh Circuit recently held that an additional insured endorsement allowed the policyholder to add insureds by oral agreement, regardless of when a written certificate of insurance verifying the addition was issued. The case illustrates the evidentiary dangers of broadly worded additional insured provisions that extend coverage by an oral agreement.

In this case, the putative additional insured, Vita Food Products, entered into a contract with the policyholder, Painters USA, to paint its manufacturing facility. In connection with this contract, Painters orally promised to add Vita Food as an additional insured. An employee of Painters was seriously injured while completing the work and filed a personal injury action against Vita Food. Vita Food demanded coverage as an additional insured under Painters’ policy, pursuant to the policy’s additional insured endorsement. The insurer refused, claiming that to establish additional insured coverage on the basis of an oral agreement, the endorsement required that a certificate of insurance confirming the agreement be issued prior to the accident. Because Painters did not request and the agent did not issue the certificate until after the accident, the insurer argued that Vita Food had not satisfied the prerequisites to coverage.

The endorsement at issue stated that additional insured coverage existed if the policyholder agreed to provide such coverage in an oral agreement “where a certificate of insurance showing that person or organization as an additional insured has been issued.” The endorsement also required that the agreement be executed “prior to an occurrence” for which the additional insured sought coverage.

The court deemed the endorsement ambiguous because the policy did not specify whether the certificate of insurance had to pre-date the loss. The court held that the language was clear that “prior to an occurrence” referred only to the point in time when the parties entered into the oral contract or agreement. However, it was not clear that the certificate of insurance had to be issued before the occurrence. Therefore, resolving the ambiguity in favor of the insured, Vita Food was required to prove that only the oral agreement occurred prior to the loss.

While no facts appeared to suggest that the oral agreement to add Vita Food as an additional insured never occurred, or at least not before the accident, the possibility was certainly apparent, given the urgent request for a certificate of insurance just hours after the accident. Moreover, once an accident occurs, there is always a possibility that i-dotting and t-crossing necessary for coverage to take effect will be done after the fact. Without a written and dated contract or certificate of insurance pre-dating the accident, an insurer is at risk that the existence of coverage will be depend on who prevails in a “he said, she said” clash. An insurer’s interest in avoiding these evidentiary issues regarding oral agreements underlies the policy’s requirement that a certificate of insurance be issued to confirm an oral agreement to provide additional insured coverage. However, to better protect insurers from problems highlighted in the Vita Food case, policy language should clearly require that a certificate of insurance pre-date the accident.

The case is Cincinnati Ins. Co. v. Vita Food Prods., No. 15-1405, 2015 U.S. App. LEXIS 21878 (7th Cir. Dec. 16, 2015).