Construction industry contractors, especially those operating in the design/build space, could derive substantial benefit by adding Loss Mitigation and Rectification, also known as Mitigation cover, to a Professional Indemnity (PI) policy.
Mitigation cover provides contractors with coverage for costs to correct a design or professional services error before it becomes a PI claim thereby allowing the contractor to manage its relationship with its client. Mitigation is a relatively new offering, with significant growth in the market over the past 10 years.
The Willis Towers Watson team has seen a high number of coverage and claim issues associated with Mitigation. In a series of articles, we will discuss Mitigation cover and how it is intended to work alongside a contractor’s PI policy. We also share suggested practices that promote the early identification of Mitigation matters, minimise the most frequent claim and coverage issues that arise, and maximise the benefits of the cover for the contractor.
Mitigation cover expands a contractor’s PI policy, providing insurance coverage for costs incurred in correcting a design defect discovered during the course of construction and, in some cases, after the construction is complete.
The aim is to eliminate the need for, and costs associated with, a third-party PI claim. Mitigation cover can also provide the contractor with funding to correct an error or omission by a third-party design professional, allowing the contractor to keep the project moving without first having to file a PI claim against the contracted design professional. Having the financial protection to take pre-emptive rectification action can greatly assist in the contractor managing its relationship with its client.
The costs and expenses covered are typically defined as those that are “reasonable and required” and deemed necessary by the insurer in order to minimise or prevent a potential PI claim. Mitigation cover will not cover overheads and/or loss of profits, nor the costs of any upgrades or betterment to the original design.
One critical aspect of a Mitigation claim by a contractor is that it must arise from professional services, activities or duties that are defined and covered by the policy. The definitions of “professional services”, or alternatively “professional activities and duties”, used in contractors’ PI policies vary widely. Essentially, this term means:
The contractor must first obtain agreement from the insurer that the act, error or omission at issue on the project falls within the definition of professional services, activities or duties. The standard for establishing fault on the part of a contractor or design professional can be generally characterised in the following terms:
So in establishing a Mitigation claim, the contractor needs to be prepared to show the insurer, and obtain its agreement, with respect to what act, error or omission has occurred, that it falls within the policy’s definition of professional service, activities or duties, and that it meets the fault standard above.
Contractors’ PI policies are universally written on a claims-made and reported coverage form. This means the policy that will respond to a claim is the one in force when the claim is made, not the policy in force on the date when an “occurrence” takes place.
An associated policy requirement that must also be considered is the policy’s retroactive date. This is the earliest date on which the actual professional services or activities on the project were rendered for which cover will apply. If those services were rendered prior to the retroactive date, no cover will apply, even if the claim is made during following policy periods.
Notice provisions in Contractors’ PI policies can take various forms, including immediate notice or prompt notification as soon as practical after discovery. However, an equally important notice requirement for Mitigation cover is the requirement that the insurer approve any Mitigation expenses and costs, in writing, prior to the contractor incurring the cost of the corrective action. All insurers will contest cover for costs incurred prior to their notice and written approval.
A “claim” under PI cover is typically defined as a monetary demand or notice, or assertion of a legal right alleging liability or responsibility on the part of the insured. These situations are relatively straight forward and easily recognised as a “claim” that needs to be reported.
Conversely, when a Mitigation matter first develops on a project, these claim reporting triggers are frequently not present. Mitigation matters are frequently self-identified by the contractor, or its team of sub-consultants, prior to the owner or other third party becoming aware of the issue. And in some cases, we have learned in retrospect, that clients have not recognised the potential for Mitigation cover under the policy until after all the corrective work has been completed at the contractor’s personal expense.
A major difficulty we observe that clients experience is the lack of communication between the project team and risk management on matters that could be reported as Mitigation claims. For example, a construction problem presents itself on a project, where the project team does not recognise the potential opportunity to file a Mitigation claim. The project team then proceeds to solve the problem, at the contractor’s expense, in order to keep the customer happy or to ensure that the project is delivered on time. The risk management team is not notified of the issue until later, after the costs have been incurred, and the opportunity to recover those costs under Mitigation cover is potentially prejudiced due to late reporting. Thus, it is imperative that senior project management staff, as well as risk management, understand the nuances of Mitigation cover and can recognise when potential Mitigation matters arise, and appreciate the stringent notice, claim reporting and insurer consent requirements under this cover.
In our next article in this series, we will explore the claim process associated with Mitigation cover with a specific focus on issue identification and tracking along with suggested practices and strategy for the successful presentation and resolution of Mitigation claims.
