Contractor professional liability / E&O insurance
Professional liability insurance protects contractors and construction companies against legal costs if a client sues over a mistake, project delay, or unsatisfactory work. This policy is also called errors and omissions insurance (E&O).
Why is professional liability insurance for contractors important?
Contractor's professional liability insurance, sometimes called errors and omissions insurance (E&O), provides indemnity for legal fees when facing accusations of errors or negligence in your work. While general liability insurance covers accidental bodily injuries and property damage, professional liability insurance covers faulty workmanship, design errors, and incorrect materials.
A mistake or oversight in your work, such as failure to follow a blueprint correctly, could cause tremendous financial harm to your client. As a result, the client might sue your business to recoup their losses.
A professional liability policy offers liability coverage related to your professional services, including:
- Failure to deliver promised services
- Negligence in providing services
- Errors and oversights
Most professional liability insurance policies are written on a claims-made basis. So, in order to collect insurance benefits, your professional liability policy must be active when an alleged mistake occurs and when the claim is filed.
Do contractors need professional liability insurance?
State laws don't typically require professional liability insurance. However, contractors frequently need this coverage to sign contracts with clients – and they may ask a subcontractor to carry their own policy to protect against errors in their work.
In particular, professional liability coverage is essential for professionals whose work impacts the safety of a building, such as architects, engineers, and home inspectors. In some cases, these types of contractors must have E&O coverage in order to maintain their license, as the rework could amount to hundreds of thousands of dollars.
Every tradesman who could cause a client to lose money through a mistake or oversight – including those involved in construction management or design – should carry professional liability coverage for their own protection. Having an E&O policy in place shows clients your business is trustworthy, protects your business financially, and can help you win contracts.
What does professional liability insurance for contractors cover?
Professional liability insurance covers a wide range of claims from clients who lost money because of your company's performance. It also covers frivolous claims, such as a client who files a lawsuit in an attempt to recover expenses unrelated to your work.
The most common professional liability lawsuits are related to delays, professional negligence, and mistakes:
Failure to deliver promised services
Delays are common in the construction industry, but when it affects your client’s bottom line, you could face a lawsuit.
For instance, a plumber might have trouble securing a specific part for a sink repair, or a roofing company might lose a key employee partway through a project. If a client sues your business for missing a deadline or failing to deliver promised results, a professional liability policy can pay for your legal expenses, such as hiring a lawyer.
Negligence in providing services
A client might sue your business for negligence if they end up needing to repair a project that wasn't done correctly.
For example, if an electrician's wiring isn't up to code, or poor welding leads to cracks in a pipe, the client might take the contractor to court to recover the cost of fixing the faulty workmanship. The contractor's E&O policy would help pay for court costs, attorney’s fees, and any resulting judgment or settlement.
Errors and oversights
If a client claims that your mistake cost them money, you could face a legal battle that drains your finances or even leads to bankruptcy.
For example, a contractor could be sued for failing to install the correct brand of windows or for using the wrong type of wood in a client's new floors. The contractor's professional liability insurance policy would pay for legal expenses related to the mistake, including a judgment if the court rules against you.
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How much does contractor professional liability insurance cost?
Contractors pay an average of $58 per month for professional liability insurance, or about $700 annually.
The cost of contractor insurance depends on the policy limits and deductible you choose, along with other factors.
Contractors can often add professional liability coverage to their general liability or business owner's policy (BOP), typically at a lower cost than buying the policies separately.
What factors affect contractors' professional liability insurance costs?
Here are some of the top factors underwriters use to determine professional liability costs for contractors:
- Policy limits and deductible. Professional liability policies with higher limits cost more but cover more expensive claims. Choosing a higher deductible can lower your premium, but your coverage won't activate until you pay the full amount.
- Coverage options. Endorsements and other options can affect your insurance rates. For instance, you can lengthen the period during which you can report claims with an extended reporting period endorsement, also called tail coverage.
- Business location. Litigation rates, state licensing requirements, and other regional factors can affect how much you pay for E&O insurance.
- Claims history. A contractor who has filed an insurance claim in the past can expect higher rates than one who has a clean history of claims. Clear communication, detailed contracts, and other risk management strategies can help you avoid claims and keep your rates low.
- Industry risks. Insurers will look at the risk profile of the specific type of work you do. For instance, architects and engineers could end up responsible for construction defects in a new building, while a handyman faces only minimal risks.
- Number of workers. Every subcontractor or employee added to a project increases the risk of an error or oversight, which can raise professional liability premiums.
- Business revenue. Increased revenue is associated with bigger projects, higher risks, and more frequent claims, which results in higher insurance costs.
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Other types of insurance for contractors to consider
While E&O is one of the most important policies for trade contractors, it does not provide complete protection. Other types of contractor and construction insurance to consider include:
- General liability insurance: This policy covers expenses related to customer injuries and accidental property damage, along with personal injuries and advertising injuries. It will pay for medical costs if a client is injured, or repairs if a contractor damages a client's home.
- Workers’ compensation insurance: Workers’ comp pays for medical treatment if an employee is injured on the job. Most states require this coverage for businesses with employees, and more states are starting to mandate it for contractors, even if they don’t have employees.
- Commercial auto insurance: This policy covers the cost of an accident involving your company vehicle. Almost every state requires this coverage for vehicles owned by a business.
- Owners and contractors protective (OCP) liability insurance: This special kind of liability coverage is often purchased by independent contractors on behalf of a general contractor or project owner to protect that party from costs related to incidents caused by the contractor.
- Surety bonds: A surety bond reimburses your client for their financial losses if your company is unable to fulfill the terms of its contract.
- Builder’s risk insurance: Builder’s risk insurance can pay for damage done to a structure still under construction, such as a fire or vandalism at a construction site.
- Contractors pollution liability (CPL) insurance: This type of environmental insurance covers pollution liability risks for contractors, such as silica dust from a construction site that impacts neighboring properties.
- Railroad protective liability insurance: If you’re doing construction work near railroad tracks or crossings, then more than likely you’ll need this special type of liability insurance to protect the railroad company in the event of a lawsuit.
- Cyber insurance: Any contractor who stores customer email addresses, credit card numbers, or other personal information should have a cyber policy. Also called data breach insurance, this coverage helps you recover financially after a security breach or cyberattack.
Find contractor's professional liability insurance quotes and buy online with Insureon
Contractors choose Insureon as a way to compare quotes in one place, get expert help, and manage their coverage online. You can fill out our easy online application to get quotes for professional liability and other policies from top-rated insurance companies.
Our licensed insurance agents can help you find the right liability coverage for your business needs, whether you work in architecture, landscaping, or construction. Once you select a policy, you can begin coverage and get a certificate of insurance (COI) in less than 24 hours.
The average costs on this page were derived from our data on small business owners in the contracting field who purchased policies through Insureon. Most of our customers have less than five employees, annual revenue ranging from around $50,000 to more than $200,000, and five years or less in business.
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