The facts
XYZ Construction Co., a general contractor, was hired to design and build an addition to a restaurant. XYZ Construction Co. hired Design Company to provide architectural and engineering services for the project. The restaurant owner advised XYZ Construction Co. that the restaurant must be complete and open for business by Memorial Day due to the increased business they receive during the summer season.
The design team at Design Company used the original restaurant architectural drawings as the basis of their designs for the addition. Unfortunately, incorrect information from the original plans was entered into their computer-aided design software. As a result of this error, the plans for the addition were six inches offset from the original restaurant. This discrepancy was discovered by XYZ Construction Co. in January during the course of construction.
To address the issue, Design Company and XYZ Construction Co. proposed a solution that involved removing the poured building slab, backfilling the site to the correct level, and re-pouring the slab. The cost for labor and materials for this correction was $100,000. However, XYZ Construction Co.’s general liability policy did not provide coverage for this error. If XYZ Construction Co. had waited for the restaurant owner to discover the error and file a claim against them, it would have taken at least four months for the claim to be investigated and for payment to be made to correct the error. The lost revenue claim which would have resulted from this error would have been substantial.
The result
XYZ Construction Co.’s Contractors Professional Liability insurance policy included rectification coverage. Rectification coverage allows an insured who is responsible for the design and construction of a project to make a claim against their professional liability policy for reasonable and necessary fees, costs, and expenses to correct a design defect. This coverage expedited the time necessary to disperse funds to correct the error. The proposal for the correction was submitted to the carrier and approved for payment by the end of February. XYZ Construction Co. was able to complete the repair and the restaurant opened shortly before Memorial Day.
Risk factors
Risk factor #1
Once a client informs its design and construction team that a deadline is imperative to its business operations, extra attention to the design and construction schedule should be given. Errors that may interrupt a business may increase the amount of damages beyond the cost of the fix to include lost business income.
Risk factor #2
Design and construction errors should be resolved as soon as possible. Delay in rectifying an issue can substantially increase the cost of correction. Once an error is discovered, it should be resolved as quickly as possible and not ignored.
The claims scenario is strictly documented for illustrative purposes only and provides an example of what a policy could cover. It is intended to provide a general overview of the program described. Please remember only the insurance policy can give actual terms, coverage, amounts, conditions and exclusions. Program availability and coverage are subject to individual underwriting criteria.