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Can I Borrow $10 Million to Pay This Uncovered Insurance Claim? (Contract Compliance Part 1)

First, let's look at this subject if you're on the giving end i.e. providing a Certificate of Insurance (COI) to an upstream party. You think you've done everything right so far. You've read the contract and sent the appropriate provisions to your insurance agent for review. You've made changes to your coverage so you're in compliance. Now you provide a COI upstream and it's accepted (no one tells you there is a problem). You begin the job, start making money and life is good. Is there a black swan in your future? Let's pretend there is.

The job was a school renovation. You're a GC and your work was valued at $12 million. Two years after project completion, kids start getting sick. Toxic mold is discovered because new windows weren't installed properly. The school has to be shut down and $6 million in repair work performed. In addition, portable classrooms are brought onsite so school can continue. Big loss. Big problem for you.

The $6 to $10 million question is, "who is going to pay for this disaster?" The insurance specifications for this job required that you buy pollution insurance with mold coverage. The spec also required that you and all subs maintain this coverage for three years post-completion. Since you paid an extra $36,000 for this coverage, you know you did that. You notify your agent and breathe a sigh of relief when he says, "No Problem". The next morning your agent calls and asks if he can come and see you in person. You agree and panic at the same time.

You can tell by the look on your agent's face that your panic was justified. He informs you that your pollution coverage has a mold exclusion. Since your agent spent most of his time taking care of your bonds (he is a surety agent dabbling in insurance) he didn't pick it up.

How did this happen? You relied on a professional and were misinformed. But the upstream party accepted your COI, you say. Yes, but most of the time those responsible for contract management don't know any more about insurance coverage than you do. Most importantly, COIs can be very deceiving. Just because there was a pollution policy listed on the COI doesn't mean you are in compliance with the spec.

As a GC, you are also on the receiving end of a Certificate of Insurance in this claim example. Let's look at your problem there in the next post.