Working as a contractor can be unpredictable, and even if you take all the right precautions, you could still face risks from errors, omissions, and negligence claims. These days, construction projects are becoming increasingly complex as clients become more litigious, a combination that could put your livelihood at risk.
Errors and Omissions (E&O) insurance can protect your business’s finances and its reputation. Before buying an E&O policy, contractors should evaluate their options carefully to make sure they provide appropriate protection geared toward the specific risks they face.
Here are the most important questions you should ask when looking into E&O insurance for your contracting business.
What Does the E&O Policy Cover for Contractors?
E&O insurance generally protects contractors for incidents in which clients claim financial harm due to alleged mistakes, negligence, or a failure to deliver promised services on the contractor’s part. It is sometimes referred to as professional liability insurance.
Unlike general liability insurance, which focuses on physical injuries and property damage, E&O specifically focuses on claims linked to your professional services and workmanship.
For contractors, a typical E&O policy will include coverage for:
- Errors and omissions in design
- Faulty workmanship
- Missed deadlines that lead to financial losses
- Negligent professional services
- Failing to meet industry standards
- Mistakes related to project management
Comprehending what your policy covers and what isn’t included is the only way to identify potential gaps that need to be addressed.
How Much Coverage Do You Need?
To determine an appropriate coverage limit for your business, you need to look at several important factors:
- The size and complexity of the project
- Contractual requirements (many clients will specify a minimum coverage amount)
- Industry standards that apply to your area of specialty
- Your business’s financial resources
- Typical claim amounts in your sector
Although keeping your premiums lower by agreeing to reduced coverage limits may be tempting, insufficient protection could leave your business susceptible to serious financial losses. Therefore, discussing your specific risk profile with an experienced insurance advisor is advisable to strike the right balance between expenses and protection.
What Claims Trigger E&O Coverage?
E&O policies generally fall into one of two categories: claims-made and occurrence-based. You need to understand this distinction and its ramifications before proceeding.
Claims-Made Policies: These will cover any claims filed during the policy period, regardless of when the work was performed. However, they may be subject to retroactive dates.- Occurrence Policies: These policies cover incidents that occurred at any time during the policy period, regardless of when the claim is actually filed.
Bear in mind that most E&O policies for contractors are claims-made, which means that you must maintain continuous coverage for complete protection. Should you decide to change insurers or let your coverage lapse at some point, you may find yourself exposed to claims related to past projects.
Are Specialized E&O Policies Available for Your Contracting Specialty?
Every construction sector specialty has a specific set of professional liability risks. For example, an electrical contractor will have different exposures than HVAC specialists and general contractors.
Therefore, seeking insurers who understand your specialty and can customize their coverage to address your most pressing risks is wise. A one-size-fits-all approach is unlikely to provide you with the protection you need in an industry as varied as construction.
What Exclusions Should You Watch For?
No insurance policy will cover every potential risk, but you should know the exclusions in advance. Common E&O exclusions for contractors include:
- Intentional wrongdoing
- Fraudulent acts
- Known claims or circumstances before the policy’s inception
- Bodily injury and property damage (although this is usually covered by general liability)
- Cost estimates and failure to stick to the budget
- Pollution liability (this will typically require separate coverage)
Review the exclusions carefully and determine if you need additional coverage to address specific gaps.
How Does the Policy Handle Your Legal Defense Costs?
Even if the allegations against you are unfounded, your legal defense costs can be substantial. Be sure to find out whether your defense costs are included inside your policy’s limits or are provided in addition to the limits. It’s also worth noting whether you must use an insurer-appointed attorney. Another point that should be clarified is whether the coverage also encompasses regulatory proceedings or is limited to civil lawsuits.
What Are the Deductible Options?
Although a higher deductible is one way to get a lower premium, you will be responsible for paying more expenses out of your pocket in case of a claim. Therefore, you must consider your company’s financial ability to absorb the numerous deductible amounts that could apply in these cases. It’s also worth exploring whether per-claim or aggregate deductibles make more sense for your situation.
Does the Policy Include Coverage for Prior Acts?
Prior acts coverage, or “nose coverage,” offers protection for claims that arise concerning work you carried out before your current policy took effect. Without it, you’ll have to cover claims arising from past projects. Keep in mind that claims related to construction defects often don’t arise until long after the project is completed.
How Does the Insurer Handle Claims?
Your potential insurer’s reputation for handling claims deserves as much consideration as the policy. Be sure to find out about their:
Claims processing efficiency- Construction industry expertise
- Reputation for fair settlements
- Litigation approach (for example, do they favor aggressive defense or quick settlement?)
Is Your Contracting Business Fully Protected?
At Business Benefits Group, we have extensive experience working with contractors and understand your business’s exclusive challenges.
Protect your business from potentially devastating claims. Contact BBG today to secure that your contracting business has the professional liability protection you need in today’s risk-filled construction environment.
