Contractor’s Professional Mitigation of Damages Coverage
As contractors’ professional liability insurance products continue to develop and evolve in the marketplace, many contractors aren’t aware of a new “first-party” coverage that has become available to them from a growing number of insurers as an optional professional liability policy coverage part.
This new coverage, called “mitigation” or “rectification,” is typically written with a sub-limit and underwritten/priced independent of the basic third party contractor’s professional coverage.
Because of the self-insured retentions and coinsurance requirements this coverage may currently only make sense for large contractors. But, as time goes on, these requirements will most likely be reduced, making the coverage practical for a wide array of contractors.
Mitigation coverage provides for first-party damages the insured incurs for remediation costs resulting from defective design, which are discovered during the course of construction, and, if not corrected, would result in a traditional third party professional liability claim from the owner or a higher-tier contractor.
The contractor can make claim directly under its professional liability policy for the costs it incurs for correcting the defects, which can result in more efficiency and lower costs while preserving a good working relationship with the owner. In theory, the contractor’s insurer then would subrogate against the design professional if the contract between the design professional and contractor allows for it.
In the first-party sense, mitigation coverage is similar to a contractor’s protective indemnity coverage. They each allow the contractor to make claim under its policy for recovering costs for correcting design defects that would otherwise be uninsured or require a formal third party claim by the owner or a higher tier contracting entity. However, this is where the similarity between the two ends.
Contractors protective indemnity applies as excess over the design professional’s own policy limits and, if it is broader in scope, provides an element of difference in conditions coverage. Mitigation coverage steps in as primary coverage with respect to the contractor’s costs associated with correcting or rectifying the defective design which is discovered during the course of construction. It allows for the construction to continue with funds from the contractor’s insurer, not the contractor.
It should be noted that mitigation coverage does include a substantial self-insured retention (SIR). Many insurers will accept a minimum SIR of $250,000 and they can go up from there. Some carriers also require some level of coinsurance and exclude internal costs and profits so the contractor and insurance company are both focused on recovering as much as possible from the negligent design professional.
An example of a mitigation claim might be the discovery, during the course of construction, that the concrete mix which was specified by an engineering firm for the foundation of a new building is inadequate to properly support the structure and needs to be rectified. Or, that the windows specified by an architect for a high rise hotel aren’t able to withstand high winds and prevent water intrusion.
Mitigation coverage can be purchased as part of a professional liability practice program or it can be project specific. However, in order to get project-specific coverage, most carriers will require that the contractor also purchase an annual practice program before they will offer project specific coverage.
The potential upside of mitigation/rectification coverage is self-evident, but there is also a downside. This coverage can expose the contractor’s professional coverage to a greater potential for loss, which could impact future insurability, rate or terms – even if the insurer has successfully subrogated against a negligent design professional.
If mitigation coverage is attached to a combined contractors professional/pollution policy, the mitigation can apply to the pollution coverage as well. A good example of this would be the discovery of mold or fungus growing during the course of construction of a habitational development.