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A look at contractors professional liability insurance

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March 15, 2021

A series of articles on rectification claim guidance – coverage issues, claim protocols and best practices.

Introduction

Rectification coverage, also referred to by some carriers as Mitigation coverage, is a separate coverage part that can be included in a Contractors Professional Liability policy. Unlike the Professional Liability coverage part, Rectification coverage provides first-party insurance to the contractor that can provide valuable funding for costs to correct a design error or professional services error before it becomes a Professional Liability (PL) claim asserted by a third-party.

Rectification coverage is a relatively new coverage offering and has seen significant growth in the market over the past 10 years. It is one of the least understood, and frequently overlooked, coverages in the construction community. As a result, Willis Towers Watson sees a high frequency of coverage and claim issues arise with Rectification coverage. This article series will discuss Rectification coverage from a design-build contractor’s perspective and how it is intended to work with the other coverages provided by a Contractor’s Professional Liability policy. We also provide suggested practices intended to promote the early identification of Rectification matters, minimize the most frequent claim and coverage issues that arise, and maximize the coverage available to the contractor.

Part I: What is rectification coverage?

The coverage options available under a Contractor’s Professional Liability policy have expanded over the recent years to include Rectification or Mitigation coverage. Rectification coverage provides first-party insurance coverage for costs the contractor incurs in correcting a design defect that is discovered during the course of construction, and in some cases after the construction is put in place, with the aim of eliminating the need for, and costs associated with, a third-party professional liability claim. It should be noted that carrier forms differ significantly. Some policy forms limit this coverage to errors that are discovered during construction, prior to substantial completion of the project, and others do not. Rectification coverage can also provide the contractor the funding to correct an error or omission by a third-party design professional, allowing the contractor to keep the project moving without first having to file a professional liability claim against the contracted design professional and establish professional negligence.

The costs and expenses covered under this coverage part are typically defined as the reasonable and necessary costs that are deemed necessary by the carrier in order to minimize or prevent a potential professional liability claim. Rectification coverage will not cover overhead and/or loss of profits and will not cover the costs of any upgrades or betterment to the original design.

Professional services

One critical aspect of a Contractor Rectification claim is that it must arise from professional services, activities or duties that are defined and covered by the policy. The typical reference to professional services that many construction professionals are familiar with from the general liability world is “engineering, architecture or surveying services”. The definitions of “professional services”, or alternatively “professional activities and duties”, used in Contractors Professional Liability policies are significantly broader and vary widely and as shown in the example below:

“Professional Services” means:
  1. Construction Management, Program Management, Project Management, Owner’s Representation, Property Management, Real Estate Brokerage/Agency, Property Development, Lease Brokering, any delegated design responsibility or design assist services, including but not limited to construct ability reviews or value engineering; or
  2. architecture; engineering; contract administration as part of design; sprinkler design; fire protection design; life safety design; mechanical, electrical or security systems design; light use, acoustical or signage design; landscaping design; surveying; quantity surveying; project accounting, quality control reviews, assist or documentation, material testing; cost consulting, economic, feasibility, technical consulting or technical studies or opinions, or scientific reviews; software design for the purpose of operating or maintaining any building system; interior design or space planning services; or design services to support Leadership in Energy and Environmental Design (LEED) certification for a project; or
  3. professional services with respect to any Building Information Modeling (BIM) systems, including but not limited to modification, alteration, transfer, protection, manipulation, use, or misuse thereof, or design assist system or program, and the foregoing within Integrated Project Delivery (IPD), Public- Private Partnership projects (P3s), or Lean Project Delivery System (LPDS); or
  4. environmental consulting, environmental engineering, environmental site assessment, remedial investigations, feasibility studies, remedial design, environmental monitoring, testing and sampling, remedial oversight and management, ecological studies, environmental training, industrial hygiene, forensic inspections and expert witness services; or
  5. ordinary technology services utilized in the performance of the Professional Services described above. Such technology services include the design, development, programming, analysis, training, use, hosting, management, support, and maintenance of any software, database, internet service, or website.

Carrier consent and agreement

As a condition precedent to establishing coverage for a Rectification claim, the contractor must first obtain agreement from the carrier that the error or omission (E&O) at issue on the project falls within the definition of professional services, activities or duties. The standard for establishing E&O on the part of a contractor or design professional can be generally characterized as the failure to render services with the ordinary degree of skill and care that would be used by other reasonably competent practitioners of the same discipline under similar circumstances. So in establishing its Rectification claim, the contractor needs to be prepared to show the carrier, and obtain its agreement, with respect to what error or omission has occurred, that it falls within the policy’s definition of professional service, activities or duties, and that it meets the E&O standard above.

Notice requirements

Contractors Professional Liability policies are universally written on a claims-made and reported coverage form. This means the policy that will respond to a claim is the one in force when the claim is made, not the policy in force on the date when an “occurrence” takes place. An associated policy requirement that must also be considered is the policy’s retroactive date. This is the earliest date on which the actual professional services or activities on the project were rendered for which coverage will apply. If those services were rendered prior to the retroactive date, no coverage will apply, even if the claim is made during following policy periods. With respect to Rectification claims, the retroactive date is frequently set at a later date than the date set for Professional Liability and Protective Indemnity coverage parts. This is usually because the Rectification coverage was added during later policy periods than the Professional/Protective coverages.

Notice provisions in Contractors Professional Liability policies can take various forms, including immediate notice, promptly notify, or as soon as practical after discovery. However, an equally important notice requirement for Rectification coverage is the requirement that the carrier approve any Rectification expenses and costs, in writing, prior to the contractor incurring the cost of the corrective action. All carriers will contest coverage for costs incurred prior to their notice and written approval.

Some carrier policy forms do include a "grace" period (frequently 10 days) for emergency response costs. These costs will be allowed if there is an emergent situation that requires immediate corrective action in order to prevent or mitigate further harm. The contractor will have the burden of showing that such immediate action reduced the amount of the covered loss that would otherwise have been paid under the policy in the absence of the immediate action. The contractor should not rely on this exception to the requirement of prior approval of Rectification costs, as in many cases it will be difficult to meet the emergency response costs justification requirement under the policy.

Claim reporting

As discussed above, Contractors Professional Liability policies are written on a claims-made and reported basis and include stringent notice requirements. A “claim” under Professional Liability coverage is typically defined as a monetary demand or notice, or assertion of a legal right alleging liability or responsibility on the part of the insured. These situations are relatively straight forward and easily recognized as a “claim” that needs to be reported. Conversely, when a Rectification matter first develops on a project, these claim reporting triggers are frequently not present. Rectification matters are frequently self-identified by the contractors, or its team of sub-consultants, prior to the owner or other third party becoming aware of the issue. And in some cases, we have learned in retrospect, that clients have not recognized the potential for Rectification coverage under the policy until after all the corrective work has been completed at the contractor’s personal expense.

One of the difficulties we observe clients experiencing is the lack of communication between the project team and risk management on matters that could be reported as Rectification claims. For example, a construction problem presents itself on a project, where the project team does not recognize the potential opportunity to file a Rectification claim. The project team then proceeds to solve the problem, at the contractor’s expense, in order to keep the customer happy or to ensure that the project is delivered on time. The risk management team is not notified of the issue until later, after the costs have been incurred, and the opportunity to recover those costs under Rectification coverage is lost due to late reporting. Thus, it is imperative that senior project management staff, as well as risk management, understand the nuances of Rectification coverage and can recognize when potential Rectification matters arise, and appreciate the stringent notice, claim reporting and carrier consent requirements under this coverage.

As a final comment, many Contractor Professional Liability policies incorporate the defined terms “responsible insured” or “principal personnel” into their policies. The policy’s Insuring Agreement or Exclusion will operate to exclude coverage if a “responsible insured” or “principal personnel” had knowledge of a pre-existing circumstance or condition that results in a claim. Additionally, the policy may place the responsibility for providing notice to the carrier if the “responsible insured” or “principal personnel” has knowledge of a circumstance that could become a claim.

However, the notice requirement typically incorporated in the Insuring Agreements for Rectification coverage frequently use the term “insured” rather than “responsible insured” or “principal personnel”. By way of example they require that “the insured must provide us with immediate notice of the negligent act, error, or omission arising from Professional Activities and Duties and of the proposed corrective action.” This unique wording applicable to the Rectification coverage part would require the insured provide immediate notice if anyone employed by the insured has knowledge circumstance or condition that would result in a claim. The more lenient notice requirements applicable to a “responsible insured” or “principal personnel” applicable to other parts of the policy will not relieve the contractor of providing immediate notice of Rectification matters and obtaining the carrier’s prior written agreement to proposed Rectification costs.

In our next article in this series, we will explore the claim process associated with Rectification coverage with a specific focus on issue identification and tracking along with suggested practices and strategy for the successful presentation and resolution of rectification claims.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.

Contacts

Marty Berger
Regional claim director – North America Construction

Dennis Pak
Regional claim director – North America Construction

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