Once upon a time, the lines of demarcation between design professionals and general or specialty contractors were crystal-clear.
Today, contractors are frequently involved in design-build or construction management contracts that incorporate some element of professional liability exposure into their operations.
For example, a refrigeration contractor may recommend that an owner move cooling lines or utilize a different type of valve on a chemical line in a walk-in freezer. Or a general contractor may step into a construction management role, providing advice on contractual relationships between the project owner and a trade contractor that they are contracting with directly.
General liability insurance covers a third party’s bodily injury or property damage arising from the contractor’s negligence, but not financial damages caused by negligent professional advice. That’s why contractors need professional liability insurance - to protect them from financial damages caused by claims of negligent professional advice.
Also known as errors and omissions coverage, professional liability insurance covers legal fees, court costs, and damages awarded to the plaintiff up to the limits of the policy.
These policies will also provide coverage for settlements and judgments against the policyholder, as well as the cost of investigating and defending a claim.
Few in the construction trade are buying this coverage.
An Assurex Global 2023 Construction Benchmark Report found that only 20 percent of those surveyed purchase some form of contractor’s professional liability insurance. That was an increase from 13 percent in the previous benchmarking survey but still nowhere close to ideal.
Questions to Consider When Deciding Whether to Purchase Contractor's Professional Liability Insurance
Here are a few questions to ask in determining whether you should purchase contractor’s professional liability insurance coverage for your firm:
- How often do you provide meaningful professional advice to your customers? The more frequently you provide professional advice, the greater your need for this insurance coverage.
- To what extent do you perform design-build projects? If your firm is frequently involved in design-build projects, the possibility of someone in your firm providing meaningful advice to an owner increases.
- To what extent do you work as a construction manager? Construction management implies a greater exposure to liability for financial losses to your customers than general or other types of construction.
- Do your contracts require you to carry contractor’s professional liability coverage?
If you think it’s time to buy an E&O policy, be aware that all professional liability insurance policies include a description or definition of what constitutes a professional service. It is critical that the definition is broad enough to capture all your business activities.
Also, beware of potential limiting exclusions that the underwriter includes in their proposal.
The purchase of contractor’s professional liability insurance has become more common as the lines between construction activities and professional advice have become less well defined. Your decision should be based on your own evaluation of your exposures, made in concert with your insurance professional.
The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. An employee-owned organization, we’ve been providing our clients with the confidence to face whatever lies ahead for more than 100 years. For more information, contact us online or call 877-440-3304.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.