Recently there have been some significant changes to contractors’ professional liability coverage that has expanded the types of coverages available and also opened the doors for more carriers providing for a more competitive market. It is no surprise then, with the influx of options available, that contractors may be unfamiliar with some of the coverages or their benefits. One such critical coverage relatively new to the game is rectification coverage, and by looking at the benefits and the ways in which it differs from other coverages, one can begin to understand its usage.
What is Rectification Coverage?
Depending on the insurance carrier, rectification coverage may also be known as mitigation of damages coverage or other similar names. Rectification coverage provides first-party coverage to a contractor for the costs that come from fixing design errors made during construction. The coverage’s purpose is to cover the type of serious flaws that, if not corrected, would result in a professional liability claim.
-Prevents litigation. The main advantage of rectification coverage over similar coverages is that it prevents the contractor and owner from having to file a liability claim. If the contractor or owner does file a liability claim, negligence has to be determined, and the case could then go to court.
-Help maintain a positive relationship with the owner. By preventing litigation, rectification coverage also allows the contractor to keep the professional relationship with the building’s owner intact.
-Claim Reporting. Because of the seriousness in nature of the type of design flaw that warrants a rectification claim, most insurance carriers require that the contractor reports the claim immediately. In addition, many will also require that along with the reporting of a claim, the contractor must also submit a plan detailing how they will fix the problem.
-Project Specific. Rectification coverage is typically a sub-limit on your standard contractor’s liability policy, but some carriers will allow the insured to add the coverage on a project specific basis. However, they also will additional requirements in correlation with the project specific coverage.
-Cost. A rectification claim is not a claim that the contractor will come out of scot-free. There is a significant financial responsibility that they must assume in the event of a claim. Professional liability policies typically have a self-insured retention (SIR) of $250,000 and upwards that the contractor is responsible for in the case of a claim. This SIR applies to any claim on the policy, including a rectification claim. Aside from the SIR, the insurance carrier requires a co-insurance on a rectification claim and most companies require a 20% co-insurance. The substantial out-of-pocket expense for the contractor for this type of claim often means that more feasible for large contractors. However, as things continue to change in the professional liability insurance hopefully, it will become more financially accessible to more contractors.
-Future consequences. If you do need to make a claim under your rectification coverage, it may be difficult to obtain insurance in the future as it suggests that you are a higher insurance risk. In the event you can purchase coverage, it will likely be much higher than you paid before.
How does Rectification Coverage Differ from Other Coverages?
You may be familiar with protective indemnity coverage, which is covered in excess of a professional liability coverage and protects the owner of the building from damages incurred by the contractor. Rectification coverage differs in that it is not an excess coverage, but replaces the liability coverage when used. Also, it is a coverage that protects that contractor rather than the owner. As touched on earlier, rectification also differs from contractors’ liability coverage as there is no need to determine negligence or to go to court.
Rectification coverage can be a very useful coverage, but may not be appropriate for every situation. Contact your insurance agent or carrier with further questions or you are in need of rectification coverage.
For more information contact Skyline Risk Management, Inc. at (718) 267-6600