As a contractor, written agreements and contracts can put your business at risk. Learn why professional liability insurance is essential to safeguarding your company's financial well-being.
Lengthy contracts and written agreements have become standard in today’s business landscape, often favoring the entity requiring them. Business owners, specifically contractors, need to be vigilant when combing through agreements. Entering a contract without thorough understanding puts your business in jeopardy.
The key clauses contractors should focus on include indemnification/hold harmless and insurance requirements:
Many elect this coverage to protect themselves from financial loss due to claims of errors or negligence, ultimately safeguarding their business in case of litigation.
Professional liability insurance (also known as errors & omissions insurance) safeguards your business against liabilities from contract service failures, including construction errors and negligence. The insurance also covers related defense costs, even for baseless claims, and often works in conjunction with a Contractor’s General Liability (CGL) policy.
In the past, entities providing professional advice such as architects, engineers, design professionals, etc. were required to maintain professional liability insurance. However, the traditional construction delivery model continues to evolve as the duties of the contractor and the design firms overlap. Contractors are taking on more risks during the building process, creating a need for professional liability insurance.
If a contractor is being asked to sign an agreement in which professional liability is included, they should determine if the requirement is valid or simply part of the standard contract language. Determining if there is legitimate professional liability exposure is imperative in contract negotiations.
Along with professional liability insurance, there is Contractors Professional Liability insurance (CPLI), which covers construction errors (such as environmental pollution) made by contractors and third parties they hire.
For example, a heating/cooling contractor is hired to install a new system in an office building, and in the process creates a carbon monoxide leak. The CGL coverage would cover any claims regarding medical bills by residents of the building, while it would be the CPLI that would cover the expenses of removing and replacing the HVAC system.
CPLI premiums are based on how much risk a company has. This coverage can be cost-effective and purchased on a practice basis (all the insured’s projects are covered) or be project specific.
Contractors are also at risk when promising to complete a project on time and within budget. Failing to meet the deadline and budget can lead to economic loss and a claim of professional negligence. A general liability policy typically excludes this loss or will have significant limitations on coverage and the limit of liability, if provided. A CGL policy can be considered to prevent a financial loss to the contractor; however, CGLs do not address economic loss or other issues of negligence, the policy mainly covers bodily injury or tangible property damage.
Evaluating your business’s professional risk is crucial in determining whether purchasing professional liability coverage is right for your company. This assessment involves analyzing various factors, such as the nature of your services, potential exposure to claims, and the overall industry landscape. By understanding these risks, you can make informed choices about the level of coverage necessary to protect your business.
Additionally, your broker serves as a valuable resource throughout this process. They can help review contracts to identify potential liabilities and assess specific coverage options, ensuring the best protection tailored to your unique needs.
Professional liability coverage has quickly become a necessity in contracting operations. When a construction project starts to go wrong, a single claim or lawsuit can be detrimental to a contractor of any size. Even the best and most experienced are vulnerable to mistakes and liability claims.
Should you be taken to court, a properly designed CPLI policy combined with a CGL policy will help mitigate costs, provide third-party indemnification, and cover other losses during a construction project. This coverage might be just what you need to secure the future of your business. For more information on how to safeguard your business from litigation, reach out to a risk expert.
