Rectification Claims: Creating the Proper Expectations
Jeff Slivka | October 30, 2023
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.
Rectification 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.
Notice 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.
- Insurer 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.
Rectification Claim Investigation
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 claim.
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.
Conclusion
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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