Rectification coverage today has become a common insuring
agreement or coverage part under a typical contractors professional liability
policy (CPrL). Claims that trigger the rectification insuring agreement are on
the rise with nearly every insurer offering the coverage in both frequency and
severity. Known by some as rectification coverage and others as mitigation
coverage, it is intended to circumvent what could otherwise be a lengthy
process of litigation to recover costs associated with design, engineering,
and/or other professional service errors created by an insured or those hired
by the insured.
Assuming the error is one that could or has risen to the
extent of professional negligence, the insurer is, under most CPrL policies,
supposed to provide those costs to assist the insured with keeping the project
as close to on schedule as possible and minimize the impact the error may have
on the project. Sometimes it works, and sometimes it doesn't.
The timing of payment is paramount when providing a remedy to
the error and any time lag could bring on additional unwanted risk or cost. When
rectification coverage first appeared in the CPrL policy 8 or more years ago,
the expectation was that these claims are going to be paid immediately—at least
compared to the typical liability claim. But we are finding that is not the
case. Call it misunderstanding of coverage intent or optimistic naivete, most rectification
claims are taking longer than the industry expected, and I don't think anyone
will argue that. The question is why.
Claim Adjustment and Payment
When I think of the question "How long does it take for
rectification claims to be paid?" not only do I develop a headache but my mind
goes back to a funny commercial from years ago that some of you may remember. It's
a Tootsie Pop commercial with the Tootsie Pop owl trying to answer the question
of how many licks does it take to get to the center of a Tootsie Pop. He licked
once, then twice, then eagerly bit into it because he couldn't wait any longer. The
ultimate answer was, "The world may never know." When someone asks me how long
does it take to get paid for a rectification claim, I think of the same answer:
the world may never know. And I think it's only because so much (seriously—so
much) has to go right for a rectification claim to be paid timely, regardless of
the size and complexity of the loss.
The entire process of adjusting a rectification claim starts
with the project team not only identifying errors in design, engineering, or
other professional service but determining the extent of those errors and the
costs that may be expended to remedy the errors. Based on the potential
complexity of the error(s), this process may not be as clear and clean as many
underwriters may think or desire.
For example, a general contractor was contracted to build a
5-story hospital and accompanying utility plant. Over a year into the project,
but well before substantial completion, cracks were discovered throughout the
upper floors of the structure. Upon initial investigation, it was not easy to
surmise the actual cause of the cracks. Extensive investigations into the
concrete mixture itself, the pour process, rebar placement, product/material
used, and the curing process ensued with the general contractor hiring a third-party
inspection company to conduct additional inspections.
After all investigations were completed, it was determined
that the cause was an engineering error—the coupler embedded in the concrete to
accept the end of the reinforcing bar was designed to accept a different "head"
or fitting. As a result, the rebar began to disengage and move, compromising
the structural integrity of the building and creating the cracking. The
concrete was removed, and the structure was refitted with the proper couplers. Total
cost of remediation was over $3 million. In this case, it was not abundantly
clear what was the root cause of the cracks. While it was ultimately determined
to be a design error, it could have been a product issue, installation issue,
engineering error, or any combination of the above.
Then that same project team or project manager needs
to escalate the matter to their corporate finance, legal, or risk management
personnel, which I have to believe is never a fun thing to do. So, rather than
elevate the matter, we think let's try to fix it or accommodate the client. At
this point, the team may begin to violate a few important provisions in the
CPrL policy, under rectification coverage, that can slow the claims process and
possibly void coverage altogether.
and Consent Provisions
Two important provisions in the policy that must be
understood when insured by rectification coverage are the following.
Claim notice or claim (or potential claim) reporting
provisions. These provisions state the strict requirements placed on the
insured as to when to report the incident (usually as soon as practicable), how
to report the incident (in writing, verbal, or either), and to whom the
incident should be reported. Unlike liability claims where a third party's
demand to pay for damages caused by the insured trigger coverage, rectification
claims are first-party claims—meaning the insured must notify the insurer that
they identified an error in design, engineering, or professional services, and
they may be negligent in some aspect, which, if not corrected, would lead to third-party
liability. Many times, these provisions are ignored because an insured
contractor may not even understand the type of insurance they have purchased
and the resulting benefits of such coverage.
consent provisions. These
provisions require the insured to seek approval from the insurer before
agreeing to remedy or fix any aspect of the design, engineering, or
construction. Often, these provisions stand in the way of adjusting a
rectification claim because of the "fix it" mentality of many construction
firms. In other words, many contractors are quick to address their client's
needs rather than consider if insurance is available for the error.
Regardless, even if there is only a hint of a
design or engineering error, it should be reported to the insurer as soon as
suspected to help ensure no policy provisions or conditions are violated.
Rectification Claim Example
In one particular rectification situation, a design builder submitted
a claim for $10 million for documented and validated design errors on a
psychiatric hospital only to have the claim outright denied. In this instance,
the design errors were discovered shortly after construction began. After
initial assessment, it was determined that the remedy to those errors could
easily cost millions.
The insured began to redesign and reconstruct. It
wasn't until near completion of the project that the insured submitted notice
to the insurer, violating the notice and consent provisions. To make things
even worse, the claim was submitted under the insured's annual practice program,
and the policy renewed with the renewal application showing nothing about this
claim or incident. While there could be good reasons for the above, it doesn't
help in getting these claims paid in a timely fashion when it is well
documented that the insured was aware of the incident for years.
Even if the event is reported according to the policy
requirements, then it's a matter of the proper documents being submitted or
retrieved to assess the validity of the claim, let alone the total payable cost
that would be incurred to remedy the situation in a timely manner. Usually, the
insurer is going to request any and all documents to properly assess the error
and whether or not the error would result in a third-party claim. In other
words, did the error rise to the level of negligence?
Be prepared to submit everything from design and
construction documents to invoices as well as the remedial options for the fix.
This can be voluminous and will add time to the
process. Some insurers may keep this process internal, while others have used outsourcing
to assess the information and reduce the overall time it takes to adjust the
Insurer-specific claims philosophy is another issue to
consider. Some insurers may approach the situation with the philosophy of
"assisting the insured in determining who is negligent" and be more focused on
pursuing a negligent subcontracted engineering firm, for example, rather than
adjusting the claim the insured presented. Ultimately, this may be in the
insured's best interest; however, this philosophy could be a big distraction and simply
add time to the process.
It would be more efficient and, in many
instances, effective if the insurer assisted with the remedy first and then pursued
any other negligent parties via subrogation. As this coverage grows in
popularity and insureds understand its true value, we may see more divergent
approaches to the oversimplified "pay and chase" mentality. Time will tell.
All of that said, and in an attempt to answer that question of
how long will it take, according to a few major insurers offering rectification
or rectification-type coverage, if all of the above goes well (the facts and the
motivation will define "well"), you can plan on getting initial payments
sometime between 1 and 6 months from the date the incident or error(s) was reported.
According to these same insurers, the "average" payout is around 9 months on a
"typical" rectification-type claim, and I won't event attempt to define "typical." In
some cases, it could take from 12 to 18 months or more to actually get paid
when proper documentation is not provided or the event has multiple issues
involving complexities that may not be easy to decipher.
And, while untimely reporting does not
necessarily mean you void coverage, when insureds do not comply with the above
policy provisions, the process of adjusting the claim is impaired and slowed. So,
if there is one suggestion or one thing to take away from this article, it is to
report the incident, error, or circumstance as soon as possible to optimize
coverage and increase the probability of a positive outcome.
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