Why Do I Need Contractors Liability Insurance?
Even when there is a primary architect for an entire project there are still other parties who can influence and change the design. Contractor responsibilities can include construction management, design delegation, hiring firms as subcontractors or A/E joint ventures and self-performed design. General liability insurance will not cover the contractor, their in-house designers/engineers or subcontractors, for any errors in the design or engineering of their project, therefore contractors need additional professional liability insurance known as contractors professional liability (CPL).
What Does Contractors Liability Insurance Cost?
Contractors professional liability insurance has several coverage and premium options. Coverage can be written on an annual basis or on a project-specific basis, for larger more complex projects. Some people choose to add their professional liability as an endorsement to their general liability policy, usually with an umbrella policy over the top to extend limits and cover any gaps between the coverages. This solution will provide higher limits, but often with higher deductibles and premiums as well. A CPL can also be written in one of two ways: occurrence or claims-made. Occurrence forms will cover events during the policy period only, but the claim can be submitted after the policy term has ended. Claims-made forms will only pay claims that were both triggered and filed during the policy period. Claims-made forms will have lower premiums as they are easier to predict costs to insurance companies.
In general, rates and premiums will be based upon the following:
- Industry and specialty.
- Geographical location.
- Number of employees, and the kind of work they do.
- Claims history.
The Insurance Shop has specialists in professional liability insurance and all the options and packages available through over 35 carriers. Shopping with us is easy because we do all the work. We’ll find out your priorities, whether they are lower premiums, comprehensive coverage or working with a specific carrier. Knowing what is important to you will help us determine the right insurance for your business. We keep the insurance companies competing for your business so our customers always get the best deal on the insurance coverage they need.
What are Common Contractors Liability Claims?
When contractors engage in a new project they are taking on the responsibility to deliver the project complete, on time and within budget. Of course, they are also taking on the risks associated with delivering a project complete, on time and within budget. If a contractor uses subcontractors or in-house design staff then their risks increase. Claims made under CPL can fit into two categories, economic loss or third-party bodily injury/property damage (BI/PD). Common claims under economic loss include design errors, inspection errors and supervision errors. BI/PD claims under professional liability can be catastrophic to a project. Injury and damage commonly result from poor design delegation or construction management (unsatisfactory supervision).
For example, if a contractor uses a subcontractor to install an HVAC system, which he/she does incorrectly leading to poor ventilation, that claim will be economically significant, as the system will have to be removed and replaced. However, if that same system started spreading mold through the building due to its design flaw and made people ill, then it will also be causing bodily injury and possible property damage. The contractor is responsible for supervising and inspecting all work done under his/her purview, according to the contractors liability insurance policy. Other responsible parties, or insureds, can be added to the policy, but generally are void once the project is complete (so any claims made after project completion fall back to the contractor).
How Can I Reduce my Risk?
The best way to reduce professional liability risk in the construction and contracting business is to DOCUMENT EVERYTHING. Written contracts, complaints and resolutions, emails and even handwritten notes are all better proof than a handshake or “your word.” Clients change their minds, forget what they asked and are used to getting their way. Don’t let them walk all over you in a frivolous lawsuit just because you don’t like to mess with paperwork! You don’t have to do it all yourself, hire an attorney or find an out of the box solution that you can customize to fit your business.
The second best way to reduce E&O risks as a contractor is by managing expectations. This means communicating clearly and regularly, especially regarding schedule changes, delays, errors and budget variances. It can be difficult to approach a client with bad news, especially with budget overruns, but communicating early enough and often enough, may help avoid misunderstandings, i.e. lawsuits. (Not to mention good communication can help avoid further errors and overruns!)
Frequently Asked Questions
- What is the difference between professional liability, errors and omissions, contractors liability and malpractice?
They are all essentially the same, but for different professions. Professional liability and errors and omissions are synonymous. Contractors liability is E&O for contractors. Malpractice is E&O for professionals like doctors and lawyers.
- Does my contractors professional liability insurance cover my employees and my subcontractors?
Yes and no. Employees, or people who work directly for your business, are covered by your policy. Subcontractors typically are not covered. Before hiring any subcontractor you should ask for a certificate of insurance, stating how they are covered. Other insureds can be added to a project-specific policy, however, once the project is completed they are no longer covered. Any claims made after project completion will be the total responsibility of the policyholder. Always make sure to discuss who is covered, and who is not covered, with your agent before finalizing any policy.
- What happens if I cancel my policy then a lawsuit is filed from before the cancellation?
Once you cancel your coverage you are no longer covered. Professional liability insurance only provides coverage while your policy is in force. If a claim arises after project completion and you’ve canceled your insurance you will be 100 percent liable for all costs and damages. However, if you do choose to cancel your policy you can purchase an extended reporting period endorsement. While this endorsement will not help in any future claims, it will be useful if any arise from previous work completed while under the original policy.