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Contractors professional liability insurance: Claim process

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March 15, 2021

In part II of our series, we explore the claim process associated with Rectification coverage and strategy for presentation and resolution of rectification claims.

Part II: Claim process and suggested practices

Issue identification and tracking

In our first article of the series, we discussed how, carrier reporting requirements for Rectification claims are subject to onerous policy requirements and carriers are generally inflexible in applying these terms. The single most frequent coverage issue we see with these claims is late reporting, which results in either all or a part of the Rectification claim being denied. Consequently, issue identification and escalation within the contractor’s organization is highly critical. A Rectification matter frequently does not involve an event or accident that would trigger a traditional incident or accident report being completed and circulated through company channels. It is typically project management staff that discovers or is first presented with the Rectification issue. And their first reaction is many times not to report a claim, because this coverage is not familiar or understood, but to fix the issue. This is good for the contractor’s customer relationship but can have serious coverage ramifications in a Rectification claim.  Thus, establishing appropriate and effective training and procedures for identifying, tracking and escalating these issues to the risk or claim management function within the company is critical. While we understand and appreciate that each contractor is organized differently in that regard, the following are suggested practices for consideration:

  • Training: Train project executives and/or on-site project leadership on Rectification and Professional Liability insurance coverage so they have the tools to identify issues that develop as insurance matters and promptly report them as soon as identified.
  • Claim process:  Establish a formal process and protocols around Rectifications and Professional Liability matters that identify internal reporting requirements, roles and responsibilities.
  • Accountability:  Establish primary accountability within the organization for handling the construction issues and insurance claims.  Examples:
    • Project Business Executive, Project Manager, Superintendent on construction side
    • Risk Manager/Claim Manager, General Counsel/Outside Counsel, CFO/Other Executive on the insurance side
  • Contract risk management review:  Establish a process around identification and management of high-risk design assist scopes of work. These situations are a frequent source of construction claim issues that can potentially be covered under Rectification or Professional Liability coverage (e.g., delegated design of exterior wall system construction or MEP component selection, sizing and design).
  • QA/QC/warranty process integration: Consider leveraging your QA/QC and warranty work processes to identify potential Rectification matters, such as:
    • Use of rework tracking system
    • Use of special cost codes to identify this type of work
    • Use of periodic questionnaires/reports to identify rework and PL issues
    • Copy reports to risk manager/claim manager, general counsel/outside counsel, Chief Financial Officer (CFO)/other executive as a second set of eyes for identifying these issues
    • Maintain a warranty/rework log that is copied to the risk management function and reviewed regularly and as part of an annual professional policy renewal claim sweep.

Coverage evaluation and strategy

As indicated above, Rectification coverage is a first-party coverage part available to the insured within the Contractors Professional Liability policy. Although not a “property” coverage, the claim process for Rectification claims is in many respects similar to a Builders Risk claim where the insured is responsible for establishing the scope of repairs and their costs, and that the loss was caused by an insured peril. In the case of Rectification coverage, the insured must establish the scope and liability basis for the Professional Liability claim, that would be made by a third party if the professional error is not rectified, and that the error falls within the policy’s definition of professional services. With this claim handling framework in mind, the following practices and processes are critical to the successful presentation and resolution of a Rectification claim. 

  • Professional issue statement/narrative: Successful Rectification claims start with the most thorough understanding possible of the construction issues at hand before the claim notice is submitted, knowing that many details may not be fully known or understood when the issue is first recognized for reporting. Careful consideration needs to be given to how the Rectification claim will be presented to the carrier, supporting that it poses a professional liability exposure to the Insured, and to determine what documentation is beneficial to provide with the notice. As discussed above, Rectification policy terms require prior carrier approval in writing of all Rectification expenses. In most Rectification claims, the insured is essentially in the position of having to prove the carrier the professional liability claim that would be made by a third-party in order to obtain Rectification coverage. In some cases, a rejection of some portion of the work, or some other informal claim may be received that can be used to trigger the Rectification claim. In either case, a well-crafted claim notice will promote the carrier’s quick and favorable coverage response to the claim for Rectification coverage in these typically time-critical matters.

Threshold questions the carrier will immediately consider are: what is the “professional” error or omission that caused the issue requiring Rectification; who committed the error; how does the nature of the error fit within the policy’s definition of professional services; was it caused by a design professional for which the insured is responsible; did the issue result from construction means and methods as opposed to a professional error; and finally, are there other coverages that will respond to the issue that are primary to the Rectification coverage. An early focus on these questions in order to craft a claim notice that responds to them to the best extent possible promotes a prompt and favorable coverage response to the Rectification claim. This approach also promotes the early consideration of other coverages and claim process issues that need to be evaluated and will provide an initial roadmap to a coverage strategy for the matter.  

  • Ancillary coverage considerations:  Rectification matters frequently overlap with other coverages which need to be considered, both for notice purposes and for whether such coverages could be primary to Rectification coverage. These could include:
    • If the issue arises during the course of construction and involves physical damage to the project, Builders Risk coverage needs to be evaluated as it will likely be primary. If this coverage includes LEG3 coverage endorsement, the Builders Risk coverage could cover repair of damaged defective work.
    • If the issue arises after construction is completed, and involves property damage, CGL coverage needs to be evaluated. It could also be primary, and if the coverage includes a Limited Professional Liability exclusion, it could cover property damage caused by professional errors by third-party design professionals.
    • Rectification coverage can also involve pollution related issues, such as mold, where either pollution mitigation coverage within the same Contractors Professional policy would respond, or a separate CPL or PLL policy.
    • Finally, if there are subcontractors or subconsultants with delegated professional responsibilities implicated in the Rectification issue, consideration needs to be given as to how best to access these parties’ coverages.
  • Handling of responsible subcontractors/professional consultants:
    • These parties must be identified early and immediately placed on notice.
    • Contracts, insurance requirements and proofs of insurance for these parties need to be collected, reviewed and evaluated.
    • Tenders and/or appropriate risk transfer strategies should be considered and evaluated based on the contract terms and coverages available, and the specific circumstances of the matter at hand.
    • Any party that has the potential to be the target of recovery or contribution needs to be provided notice of critical inspections and any destructive testing, if applicable.
    • All relevant construction documents should be collected, and expert inspections should be conducted at the earliest time possible so as to establish the right to coverage from the subcontractors/professional consultants’ respective policies.

In the final article of this series, we’ll describe the rectification claim process and explore considerations and practices to help contractors navigate that process.

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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