Skip to main content
Article

Rectification claim process

N/A
N/A

March 15, 2021

We describe the rectification claim process and explore considerations and practices to help contractors navigate that process.

Part III: Rectification claim process

As discussed in our prior two articles, Rectification claims are first party claims where the insured is required to present the proposed Rectification issue(s) to the carrier and obtain the carrier’s approval prior to incurring Rectification expenses. The following are key aspects of this process:

  • Agreed scope of rectification activities with carrier: Carrier approval necessarily involves both a liability component, and a scope of work component for each proposed Rectification activity. Some Rectification claims involve a single error or issue with clear responsibility and a simple, straightforward path to correcting the issue, which the carrier may easily agree to. However, in other more complex circumstances, a host of issues may be involved that require separate analysis of design responsibility, scope of Rectification work, etc. In these cases, it is helpful to break down the larger Rectification matter into a set of issues, each with its associated liability rationale and scope of work as a tool for presenting and gaining approval from the carrier. The Rectification work may not all progress at the same pace, so separating the matter into distinct issues or components of work and prioritizing them from a scheduling perspective can be very beneficial to the contractor in keeping the project on schedule and minimizing project delay issues.
  • Rectification cost documentation: Carriers will evaluate Rectification costs in much the same manner as a Builder Risk carrier evaluates property repair costs. They will typically use their own internal or hired consultants to review both the liability rationale as well as scrutinize the cost detail. Scope of work, unit costs, removal of profit and overhead will be closely reviewed by the carrier and most likely its consultants. The following are key issues and areas of concern in documenting and gaining approval of your Rectification cost.
    • Claim costs (format and detail):
      • It is generally best for the contractor to use its standard cost tracking systems and methodology for capturing Rectification cost to present to the carrier. A separate job code should be established to capture all potentially claim related costs.
      • Use of a master spreadsheet for capturing and presenting self-performed work and work performed by other contractors will match the expectations of the carrier.
      • Costs need to be supported by back-up cost detail including labor hours and rates, etc. and invoices where appropriate. The detail in which these costs are typically required to be documented by a general contractor (GC) for subcontracted work, or by an owner or GC for change orders, is a good standard to use. Using the projects contracted labor, equipment and materials rates should be accepted by the carrier.
    • Costs not covered:
      • Rectification expense is typically a defined term in the policy and does not include the insured’s profit, overhead, or mark-up. This does not mean that all non-direct labor costs are excluded. Labor and expenses that can be directly attached to the Rectification matter should be included in the claim submission.
      • Rectification expense also does not include any “betterment” to the project, which is typically interpreted to mean improving or changing the design or materials in a manner beyond what is necessary to rectify the error, which would be an improvement in the project for the owner over and above the original design.
    • Use of consultants:
      • In large and complex Rectification matters serious consideration should be given early in the claim process to the retention of outside consultants or experts.  There are two primary reasons for retaining consultants:
        • First, to establish the liability basis or legal responsibility for the Rectification matter, and/or the technical method of rectifying the issue and scope of that work.
        • The second is where the design error involves a down-stream design professional, or one retained by a third-party. In both situations, consideration needs to be given to the recovery or contribution aspect of the matter.
  • Other considerations and practices:
    • Requests for Information (RFI): Rectification claims are frequently very document intensive. The carriers’ typical practice is to issue an initial RFI immediately following claim notice, which may be very lengthy, and then one or more follow up RFIs depending on the complexity of the matter. Developing an organized system for transmitting the requested information, and providing a short narrative directing the carrier to the key information in support of the claim, can promote a more prompt and favorable coverage response.
    • Standing conference call schedule: Rectification claims involve a highly collaborative process with the carrier that require frequent and sometime iterative interactions with the carrier. Establishing standing conference calls or defined dates for the next communication can be critical to obtaining the required approvals for the Rectification planned.
    • Interim loss payments by carrier: Rectification claims typically involve the contractor incurring significant expense in completing the work, many times over an extended period. As with property claims, carriers will frequently agree to partial reimbursement of Rectification expenses as the matter progresses if warranted.
    • Coverage communications: If the above processes are completed promptly and effectively, it would be our expectation that the carrier approve the requested Rectification plan promptly as well. Approval of the Rectification plan should be provided in writing as required by the policy. Any coverage reservation or denial regarding the matter should be reviewed with your broker claim advocate.
  • Considerations for concluding the claim
    • Carrier subrogation rights: Most Contractor Professional Liability policies attempt to place the carrier's recovery rights ahead of the Insured’s. This may not be a significant issue if the loss is entirely covered and the SIR is not large. However, these matters can frequently be more complex, involving situations where:
      • Additional coverage lines are involved in the loss, that also have a subrogation interest, such as property or pollution coverages,
      • Uncovered losses due to coverage issues or inadequate limits on the Rectification claim where the contractor has an uninsured personal interest in the recovery,
    • Recovery allocation agreement: In situations where the contractor is not fully compensated above the SIR by the Rectification settlement, the contractor should attempt to negotiate an equitable recovery allocation agreement with the carrier(s), which includes the costs of pursuing the recovery, that is more favorable than the policy terms giving the carrier first rights to recovery. This needs to be considered and negotiated in advance of any settlement if possible.
    • Recovery from third-party design professionals: One of the benefits of Rectification coverage is that it covers the contractor in situations where the design error was committed by a subcontractor or other contracted design professional. Without Rectification coverage, these situations would fall within the protective coverage afforded by many Contractor Professional Liability policies. Under the protective coverage, it is the contractor’s obligation to pursue at its own expense the down-stream party for recovery under that party’s professional liability coverage. If the down-stream party’s coverage is inadequate, then the Contractors Protective coverage steps in. If Rectification coverage applies, it then becomes the carrier’s obligation to pursue the recovery, at its expense, and not the contractor’s as it would be in a protective claim.

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

Related content tags, list of links Article Construction
Contact Us