The dangers of contracting work aren’t limited to workplace accidents; there is also the potential for highly damaging professional liability risks that could harm your reputation and financial viability. Errors and Omissions (E&O) insurance protects against worrying claims of negligence, mistakes, or inadequate work, and all contractors need to understand how it works.
Here is a look at the basics of this valuable protection.
What is Errors and Omissions Insurance?
Errors and Omissions insurance, or Professional Liability insurance, offers coverage for incidents in which a client claims the contractor’s services were inadequate, negligent, or did not deliver the promised results.
Unlike General Liability insurance, which offers important protection for bodily injury and property damage claims, E&O insurance focuses on the potentially serious financial losses a client could suffer due to mistakes, or alleged mistakes, as part of your professional services.
These claims could manifest in contracting work in many ways, such as design errors, missed deadlines, failure to follow specifications and other professional issues. Even if you haven’t done anything wrong, defending yourself against this claim and proving your innocence without proper insurance protection could be costly.
Why Do Contractors Need E&O Coverage?
Those involved in contracting often contend with multiple complicated projects at any given time, which can have significant financial implications. Unfortunately, no matter how careful and experienced a contractor is, there is still the potential to make a mistake or be accused of inadequate performance.
Here are some of the factors that make this type of policy essential for modern contractors:
- Clients are becoming increasingly demanding in terms of their expectations, raising the standards for performance. A client who expects perfection could well pursue legal action if the project does not meet their expectations, no matter how unrealistic they might have been.
- Some contract requirements specify that contractors must take out E&O coverage. These days, many clients and general contractors will not award a project without it, which could cause you to miss out on potentially lucrative opportunities.
- Today’s projects are more complex than ever, and regulations are becoming more stringent, creating more opportunities for mistakes regardless of training and experience level.
- The rising legal defense costs apply to every case, even if you were ultimately not at fault. E&O insurance helps cover everything from attorney fees and court costs to settlements.
Common E&O-Related Claims Against Contractors
What types of E&O-related claims are you likely to face as a contractor?
- The most common claims involve design considerations, such as failing to include necessary elements or making mistakes in the design that cause problems during construction.
- Another area of exposure is failing to complete work on time, particularly when this leads to a significant financial loss for your client. Similarly, a budget overrun can also cause problems. Other claims might involve failing to follow applicable building codes and not obtaining proper permits.
- Using improper materials or installation methods that result in performance issues could also lead to claims, even if these problems don’t develop until months or years after the project’s completion.
Fundamental Elements of Contractor E&O Policies
Which policy elements should contractors be most concerned with when evaluating E&O coverage options?
Coverage limits indicate the maximum amount the insurer will pay for claims. Therefore, it is essential to carefully assess your risk exposure to establish that your limits are appropriate for your business’s size and the types of projects you tend to take on.- One important decision contractors must make is whether to go with a claims-made or occurrence policy. Keep in mind that most E&O policies are claims-made, which means they only cover claims that are reported during the policy period or within an extended reporting period, regardless of when the work was initially performed.
- A policy’s retroactive dates tell you how far back your coverage goes for work you’ve done in the past. If an appropriate retroactive date is not set, any work you completed before the policy began could lack proper protection.
- Exclusions list the types of claims your policy won’t cover. This might be anything from intentional wrongdoing or fraudulent acts to bodily injury claims. Pay close attention to these exclusions so you won’t be caught off guard by any gaps in coverage.
- Defense cost provisions explain whether any legal expenses the policy pays out will count toward your policy limits or will be covered separately; this can greatly impact the level of protection provided.
Get Guidance From Experienced E&O Insurance Professionals
E&O insurance can be complicated, and you need professional advice to secure optimal protection. At Business Benefits Group, our consultants understand the exclusive challenges you face as a contractor.
With nearly three decades of experience offering contractors strategic guidance on insurance solutions, we are well-positioned to help you develop a complete protection strategy that suits your needs and budget. Contact us today to get started.
