Contractors Professional Liability (CPrL) Insurance—Rectification/Mitigation Enhancement
Jeff Slivka | March 31, 2017
Responsibilities were clearly defined under the design-bid-build model that dominated the commercial construction industry over a decade ago. Today, the trend toward design-build, fast-tracking, and accelerated delivery methods—coupled with the desire to take on new projects requiring an expanded level of experience or expertise—has not only created new job opportunities for building professionals, but also made them far more susceptible to liability that can be covered by CPrL insurance.
In addition to being drawn into the earliest stages of the project development cycle, the services of these construction professionals have merged so intensely that even their "consultative advice" can produce exposures in this current "collaborative" construction environment. As a result, the CPrL insurance marketplace has continually expanded to accommodate these changing circumstances. In fact, the number of contractors purchasing this form of coverage continues to rise along with their knowledge of potential risks and claims.
As commonly defined, CPrL provides coverage for damages arising out of negligent acts, errors, and omissions from the professional services performed by or on behalf of any construction firm, be it a general contractor, design/builder, construction manager (at-risk or agency), or specialty subcontractor.
Little more than a professional liability coverage part a short time ago, CPrL programs have also broadened significantly to include various first-party coverage parts—contractor's protective indemnity and rectification/mitigation (R/M) insurance to be specific. However, it must be noted that these coverage forms are very different. This is true even though they were both designed as first-party coverages intended to insure contractors from the defects in professional services performed by design professionals hired by the insured (contractor) as well as the defects in professional services created by the insured. Today, the CPrL coverage commonly consists of the following.
- Professional liability (third-party) protection for liability arising out of negligent acts, errors, or omissions in the issuance of professional services performed by or on behalf in the insured.
- Protective indemnity (first-party) protection for damages incurred by the insured (contractor) that the insured is legally entitled to recover from errors created by design professionals. However, this is an excess coverage, meaning that it pays for the difference between the total damages and the damages paid by the professional liability limits available to the insured from the design professional.
- Rectification/mitigation (first-party) pays for the expenses reasonably incurred during the mitigation or rectification of 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. Rectification/mitigation coverage is a primary coverage.
CPrL Mitigation Coverage Variables
Currently, there are about 12 insurers offering some level of mitigation/rectification in their policies. But, there are distinctions among these providing for two very different types of mitigation coverage. One provides coverage for the costs incurred to remedy design or professional service errors, while the other only covers the costs incurred to prevent further damage once the error is identified.
For instance, consider a simple commercial, mixed-use structure designed or specified with the improper rebar density. The structure is near completion and hasn't collapsed. However, it can't be used for its intended purpose due to the engineering error.
The mitigation form that only covers costs incurred to prevent further damage may only pay for the temporary columns needed to support the structure, ensure the structure doesn't collapse, and prevent further damage. But, it would not pay for the cost to redesign or provide a permanent remedy. Conversely, 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. For these reasons, among others, it is extremely important to understand the type of mitigation coverage purchased.
Supplemental Limits
Another variable concerns supplemental limits, which ensure liability coverage is not eroded beyond policy limits, unlike sublimits. This normally entails 80/20 coinsurance provisions—80 percent of the cost incurred by the insurer and 20 percent incurred by the insured—that are placed on top of a self-insured retention (SIR). Subsequently, an insured with a R/M supplemental limit of $250,000 SIR and $2,000,000 in damages, would likely assume $250,000 plus another $400,000 via the coinsurance provision, all of which would not be applied to the overall liability limit. It should be noted that this provision is diminishing, although it still remains in the marketplace.
Professional Services
Other considerations surround the definition of professional services, which can vary among insurers. For example, one insurer might apply the coverage to services specifically related to engineering or architectural services, while others might only insure "covered design services" such as the design, design assist, engineering, or value engineering activities performed by an "insured." You must keep in mind that the R/M enhancement only insures professional services as defined by that coverage part; the other coverage parts may carry a different definition of professional services.
Claim Reporting
Furthermore, there are even differences among insurers for the reporting of claims. Some require errors to be reported as soon as possible. In some cases, the R/M coverage will not apply if the claim/error is not reported prior to the project's substantial completion. This is because the issue could result in a third-party claim and inclusion under the liability coverage part. In addition, most insurers not only require the prompt reporting of errors, but also require corrective plans of action, although grace periods are offered by several insurers.
Lastly, please note that R/M claims are not treated like typical liability claims by insurers. They require immediate action to ensure the coverage takes affect when needed. Always thoroughly evaluate CPrL program terms in relation to the insurer's ability to understand and efficiently manage claims, especially in the situation where R/M coverage is provided. There is no looking back when calamity strikes.
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