Contractors’ professional liability insurance (CPrL) has expanded greatly in recent years, both in the number of carriers offering the coverage and the depth of the coverage itself. Not long ago, a CPrL program was comprised simply of a professional liability coverage part. Today it’s broadened significantly to include third-party liability and various first-party coverage.

As contractors educate themselves on the risks and potential claims associated with their services, the number of them purchasing these coverages has increased dramatically. Today, typical CPrL programs consist of three main coverage parts:

Professional Liability coverage (third-party): for liability arising out of negligent acts, errors or omissions in the performance of professional services performed by or on behalf in the insured
Protective Indemnity coverage (first-party): for damages incurred by the insured that they are legally entitled to recover from a design professional excess of the DP’s PL policy
Rectification/Mitigation (R/M) coverage (first-party): for expenses reasonably and necessarily incurred in mitigating or rectifying a negligent act, error or omission arising from professional services (performed by or on behalf of the insured) that would otherwise lead to a professional liability claim

R/M is intended to pay first-party costs incurred by a contractor to remedy design and/or professional services errors, while reducing the likelihood of third-party or liability claims. It differs from the other first-party coverage under a CPrL program—protective indemnity—because it’s a primary coverage subject to a self-insured retention (SIR). Protective indemnity is an excess coverage part that also pays for first-party damages, but in excess of the professional liability limits provided by design professionals hired by the contractor.

What happens if a structure is built with the wrong sized rebar? Depending on which type of R/M coverage you have, you may have to pay for the correction yourself. (Photo: iStock)

Types of R/M coverage

There are currently about 10 markets offering varying forms of R/M coverage, and there are two very different types of mitigation coverage out there. One provides coverage for the costs incurred to remedy a design error or error in professional services and is similar to current forms of rectification coverage, while the other only covers the costs incurred to prevent further damage.

For example, consider a parking structure designed or specified with the improper sized rebar. The structure is near completion and hasn’t collapsed, but can’t be used for its intended purpose due to the design error. The mitigation form that only covers costs incurred to prevent further damage may only pay for the temporary columns needed to shorten the spans, ensure the structure doesn’t collapse and prevent further damage. It wouldn’t pay for the cost to redesign or a permanent remedy.

The other mitigation coverage would pay for the costs to redesign and provide a permanent solution. It would also keep the liability coverage intact in the event a third-party claim is made. With major distinctions like this, it is extremely important for contractors to understand the type of mitigation coverage purchased.

Another variation of R/M coverage offered is the use of supplemental limits, which stand in addition to the liability limit and will not erode overall policy limits, unlike sub-limits. The carriers offering R/M with supplemental limits usually do so with 80/20 co-insurance provisions—80 percent of the cost incurred by the carrier and 20 percent incurred by the insured. This is usually on top of a self-insured retention that the carrier applies to the overall program.

So, if an insured has an R/M with a supplemental limit, $100,000 SIR and $1,000,000 in damages, that firm will likely assume $100,000 plus another $200,000 via the coinsurance provision. However, these damages will not interfere with the liability limits.

Different R/M carriers will offer different coverage limits. Contractors should always check with their agents for what coverage they have. (Photo: iStock)

Carrier variance

Another key to understanding the applicability of R/M coverages is the professional services provided under the coverage grant. These can fluctuate greatly from one carrier to the next and be inconsistent with the definition applied to the liability coverage part.

For example, one carrier applies the coverage to services specifically related to engineering or architectural services such as designs, plans, drawings, specifications, calculations, surveys or studies. Another may apply the coverage to what they call covered design services. They go on to define covered design services as design, design assist, engineering or value engineering performed by an “insured.” However, others will have an extensive definition ranging from architecture and engineering to surveying, construction management and program management. This is a simple definition used to ensure the R/M purchased actually covers the professional services performed by the insured.

When it comes to reporting requirements or provisions, some carriers will require errors to be reported as soon as possible or practicable, but never after substantial completion. So, if the claim isn’t submitted or the error not reported prior to substantial completion the R/M coverage will not apply.

The reasoning for this is that any issue identified would result in a third party making a claim and therefore covered under the liability coverage part. However, this may not be the case in every instance.

Most carriers not only require the prompt reporting of the error, but also the plans to remedy the error or any proposed corrective action. There are a few carriers that offer a grace period, typically 10 days. The grace period may be awarded during intense situations requiring immediate containment or the actions needed to prevent further damage.

When looking for coverage, consider all the nuances and remain open-minded when it comes to selecting the appropriate R/M coverage for a specific project. Evaluate CPrL programs in their totality—product, services and carrier strength—before making a decision. Almost as important as the coverage is the carrier’s ability to understand and manage claims when they occur. R/M claims are unlike liability claims and require immediate and effective action to ensure the coverage will perform as proposed–limiting liability and the total cost of the error.

Special Reports /

What contractors need to know about rectification and mitigation coverage

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