Professional liability insurance, which is also called errors and omissions (E&O) insurance, protects professional service providers against claims of negligence, mistakes or failure to perform professional duties. If you are a contractor who provides design and/or construction management services, you should have E&O insurance in addition to your commercial general liability (CGL) policy. This is because CGL policies have a near-universal exclusion for economic liability that arises out of the provision of professional services.
In addition, your E&O policy can offer protection when working with subcontractors who provide design services. While you should have indemnification agreements with your subcontractors – by which they agree to hold you harmless from liability for their errors – E&O insurance can protect you in situations where the indemnification agreement is not enforceable.
What Does E&O Insurance Cover?
E&O insurance will cover legal defense costs and the cost of any settlements or judgments against you if you are sued by a dissatisfied client for errors, omissions, negligence, undelivered or underdelivered work, or inaccurate advice. While your CGL policy will protect you if your work causes property damage or bodily injury to a third party, it will not cover economic losses suffered by your clients that result from errors or omissions in your work.
Professional Liability Claims Scenarios
As a provider of design-build services, you may be sued for errors in plans or specifications that lead to structural issues or project delays that harm the client financially. For instance, design flaws in a building’s foundation could cause settlement issues, cracking and structural damage. E&O insurance can cover the cost of fixing the problem and other costs associated with the claim.
E&O insurance provides coverage if you are sued for negligence in failing to deliver promised services, or for delivering promised services late. If, for instance, you are hired to renovate a building and you fail to complete the project on time due to poor planning or poor management of subcontractors, and your client is harmed financially by the delay, your E&O policy will provide protection.
If you are sued for providing inaccurate advice that led to financial loss, your E&O policy will provide coverage. For instance, if you advise a client to use a design element that does not meet building codes – thus necessitating costly modifications – your policy will provide coverage.
If you fail to include an essential step or component in the construction process, causing a problem with the completed project, your E&O policy will cover the cost of correcting your omission and any resulting damages.
Claims-Made Policies
E&O policies are generally claims-made policies, which means they cover claims that are made during the policy period. If, for instance, you have an active policy that you opened at the start of this year, and you are sued this year, coverage will be triggered, since the claim occurred during your policy period. This is true even if the underlying event that led to the claim happened before you took out the policy – provided the potential claim was not something you knew about or should have known about prior to signing the insurance contract.
It is also important to note that claims-made policies often have a retroactive date, which limits how far back in the past triggering events could have occurred. For instance, say your coverage began on January 1, 2024 and has a retroactive date of January 1, 2021. If you are sued by a client today for damages stemming from an event that occurred in 2020, you will not be covered for the claim because the event happened before your retroactive date.
Your claims-made policy may also have a brief extended reporting period, or tail coverage, which covers claims made for a specified time after your policy expires. This provides a grace period in the event a claim is brought against you immediately after your policy expires.
How Much Does E&O Insurance Cost?
The cost of an E&O policy varies based on several factors, including your industry, location, number of employees and claims history. It also depends on your policy limits. There are two types of limits that apply to E&O insurance: occurrence and aggregate. The occurrence limit is the maximum amount the insurance company will pay toward any one claim. The aggregate limit is the maximum amount the insurer will pay in claims for the policy’s lifetime, which is usually one year. For example, a $1 million/$2 million E&O policy will pay up to $1 million for any one claim and up to $2 million for claims made over the lifetime of the policy.
Different policies have different exclusions, and it is important to understand the details of the policy to ensure it will provide you with the protections that you and your business need.
If you have questions about E&O insurance or are involved in a dispute with your business insurance company, contact Schwartz Conroy & Hack. We have the expertise, experience and tenacity to make sure insurance companies keep their promises to you and your business.
