Why a Standard Policy Does Not Help Early

Professional liability policies are claims made and claim triggered. The policy responds to a claim, which is generally defined as a written demand for money or services, or the institution of proceedings, alleging a wrongful act. Defense and indemnity follow from that trigger.\n\nBefore a claim exists, the policy\'s machinery has not started. A firm that spends its own money to redesign and correct an error has incurred a cost, but it has not had a claim, and most policies will not reimburse it. Worse, some policies contain language that can be read to prejudice coverage if the insured voluntarily assumes an obligation or makes a payment without consent.\n\nThe result is a perverse incentive. The cheapest moment to fix a design error is immediately, while the work is still accessible and before downstream trades have built on top of it. But the policy only engages once the expensive moment arrives.\n\nRectification coverage, also written as mitigation of loss or error correction coverage, inverts that by covering the cost of correcting a design error discovered during construction, before a claim, where doing so reduces or prevents a covered claim.

• Professional liability is claim triggered and does not respond before a claim exists
• Voluntary payments without insurer consent can be problematic under some policies
• The cheapest time to fix an error is before anything is built on top of it
• Rectification coverage pays for early correction that prevents a larger claim

How the Coverage Works

The structures vary, but most rectification endorsements share a common shape.\n\nThere must be a design error or omission that would, if left uncorrected, be reasonably likely to give rise to a claim covered by the policy. The error must be discovered during the construction phase, usually before substantial completion. The insured must notify the insurer and obtain consent before incurring costs, which is the single most important procedural requirement in the whole endorsement. And the costs covered are the additional costs of correcting the error, which is where the definition gets careful.\n\nWhat is generally covered is the increase in construction cost attributable to correcting the error: the demolition and rework, the additional materials and labor, and sometimes the firm\'s own redesign time. What is generally not covered is the cost of work that would have been required anyway had the design been correct in the first place, often called betterment. If the undersized beam should have been a larger beam, the policy will not pay for the larger beam; it may pay for removing the installed one and the disruption of replacing it.\n\nLimits are typically a sublimit of the professional liability limit rather than additional coverage, and there is usually a separate retention, sometimes higher than the policy\'s standard deductible.

• Requires an error likely to produce a covered claim if left uncorrected
• Discovery must occur during construction, commonly before substantial completion
• Insurer notice and consent before incurring costs is mandatory
• Betterment, the cost that would have been incurred anyway, is excluded
• Usually a sublimit of the professional liability limit with its own retention and sometimes coinsurance

The Procedural Trap

The most common way firms lose this coverage is by using it the way they would want to: by fixing the problem fast and sorting out the insurance afterward.\n\nNearly every rectification endorsement conditions coverage on prior notice and consent. A firm that directs a correction on Tuesday and calls its broker on Friday has likely forfeited the coverage, even though the correction was the right decision and even though it saved the insurer money.\n\nThe fix is a written internal protocol. Every project manager and principal should know that the discovery of a potentially significant design error triggers two calls in the same hour: one to the client or contractor to stop or hold the affected work, and one to the broker or insurer to report the circumstance and begin the consent process.

• Prior notice and insurer consent is a condition, not a formality
• Build a written protocol: hold the work, then notify the insurer, in the same hour
• Train project managers and principals, not just the firm\'s finance or risk contact
• Understand your circumstance reporting provisions and use them
• Reporting a circumstance preserves coverage in the current policy year

Review Your Professional Liability Program

If you are not sure whether your policy includes rectification coverage, or what the notice procedure is, those are two answers worth having before the next construction administration phase begins. We place professional liability for architects, engineers, interior designers, and design build teams. Schedule a conversation at calendly.com/grandbayfinancial.\n\nThis article is for general information and is not a substitute for policy language or professional advice.