Contractors increasingly do work that extends beyond building from a completed set of plans. Recommendations, design input, value engineering, and other professional responsibilities can create exposures that fall outside the scope of a contractor’s general liability coverage.
Those exposures exist regardless of whether a project agreement requires contractors errors and omissions (E&O) insurance. A contractor may have operated for years without carrying E&O coverage or could be facing a professional liability claim while still taking on work that creates professional liability risk.
When a new contract requires E&O insurance, it gives you an opportunity to help your client understand what professional responsibilities they are already assuming, where their existing coverage may stop, and what contractors E&O is designed to protect.
Why Are More Construction Contracts Calling for E&O?
With design-build and other collaborative project delivery models becoming a larger part of the construction market, contractors are taking on greater design and project responsibility. Design-build alone is projected to account for more than 47% of U.S. construction spending by 2028.
Design-build promotes collaboration from the outset, bringing owners and project teams together earlier in the process. As contractors become involved in delegated design, design-assist, value engineering, construction management or subcontracted design, they may take on responsibilities that can connect them to professional-service allegations.
The opportunity that comes with taking on a larger role may be easier to see than the liability that comes with it. A contractor may be comfortable taking on that responsibility without fully appreciating the exposure that can occur if the work is later alleged to have caused a problem.
Owners and upstream contractors may require E&O to confirm that these professional exposures are backed by insurance. For the contractor, though, the requirement can bring attention to a risk worth protecting whether someone else requires the coverage or not.
What Can Contractors E&O Cover That General Liability May Not?
General liability insurance primarily addresses covered bodily injury and property damage. Contractors E&O, on the other hand, is designed to address certain claims arising from alleged errors or omissions in the design-related, advisory, or other professional responsibilities a contractor takes on, subject to the terms of the policy.
Suppose your client is asked to recommend a particular building material or system as part of the job. The contractor makes the recommendation, but the choice is later alleged to have been unsuitable for the application, resulting in costs to remove and replace the work. The allegation isn’t necessarily about bodily injury or property damage. It’s about an alleged error in the professional responsibility the contractor took on.
Contractors professional liability insurance can also include features such as:
- Faulty workmanship coverage
- Contractors pollution liability
- Rectification coverage, also known as mitigation coverage, which is intended to address certain costs associated with design, engineering or other professional-service errors
Coverage varies by form and may be subject to notice, insurer consent, and other policy requirements.
Why Consider Contractors E&O Even When the Contract Doesn’t Require It?
When reviewing design-build insurance requirements, look beyond the certificate request to the work your client performs. Rather than waiting for an E&O requirement to appear in a contract, evaluate your client’s operations, project delivery methods, contracts, and professional responsibilities. If the business has expanded into roles that create professional liability exposure, its insurance program may need to keep pace.
Consider whether your client is:
- Recommending products, systems, materials or construction methods
- Participating in design-assist or accepting delegated design responsibilities
- Managing or coordinating design work performed by subcontractors
- Reviewing plans or specifications
- Providing construction management or other services that involve professional judgment
Subcontracting the design work does not necessarily remove the contractor from the exposure. If a problem arises, the contractor may still be named in an allegation or a lawsuit. What matters is not only who performed the work but also what responsibilities your client assumed.
Don’t Let the Contract Be the First E&O Conversation
A new contract requirement may be what first brings E&O insurance for contractors to your attention, but it may also reveal exposures that have been part of your client’s business for years. Reviewing how your contractor clients operate can help identify those exposures before a certificate request puts them on the table.
Have a contractor client facing a new E&O requirement or a professional exposure that may not fit within traditional liability coverage? Contact Cochrane & Company’s Professional Liability team to discuss available options.
About Cochrane & Company
For more than six decades, Cochrane & Company has been proudly at the forefront of the insurance industry. Our experience has enabled us to innovate in powerful ways, reimagining the E&S market, and providing technology solutions that make it easy to do business with us. Licensed in all 50 states, we proudly serve clients across the nation, providing personalized and powerful solutions to help you become an even better partner for your clients. Speak to one of our experienced professionals today by calling (855) 967-0069.