When Contractors Need Professional Liability Insurance

April 25, 2023

Gain a better understanding of how to handle professional liability requirements embedded in your contracts.

When Contractors Need Professional Liability Insurance

Lengthy contracts and written agreements have become the norm in today’s business practices. Business owners, especially contractors, should be cautious as these contracts and written agreements can be (and usually are) one-sided in favor of the entity requiring the signed contract or written agreement.

If you do not enter into a contractual agreement with your eyes wide open, you are putting your business in jeopardy.

While reviewing the entire contract is essential, two key elements of the contract you should pay close attention to are the indemnification/hold harmless and insurance requirement clauses. The indemnification/hold harmless clause defines the responsibility and liability of one or more parties for any losses, damages or claims that may arise from the contract. The insurance requirement clause outlines the types and minimum amounts of insurance that are required.

Insurance requirement clauses can include everything and the “kitchen sink.” A common requirement seen in construction contracts in recent years is the requirement for professional liability insurance (a.k.a errors & omissions/E&O insurance). Though it is common, many contractors do not understand why. Let’s look at what’s going on.

Why are contracts requiring professional liability insurance?

In the past, only entities providing professional advice such as architects, engineers, design professionals, etc. were required to maintain professional liability insurance. But today the traditional construction delivery model is evolving as the duties of the contractor and the design firms overlap. This is forcing contractors to take on more risk, creating a need for professional liability insurance.

Contractors should determine if the requirement for professional liability is valid or simply part of the standard contract language. Determining if there is legitimate professional liability exposure is imperative in contract negotiations.

What does professional liability insurance cover?           

Professional Liability Insurance is coverage designed to protect your business against liability incurred as a result of a mistake (error) and or if you failed to perform a service (omission) agreed to in the contract. Professional liability insurance also covers the related defense costs, even from groundless claims.  

Contractors professional liability (CPL) insurance provides coverage to contractors and other building professionals for construction errors by the contractor, as well as, by third parties hired by the contractor.

For example, if a contractor estimates the cost of a retail office building to be $2 million. As construction continues, it is discovered the construction costs to comply with ADA regulations were not budgeted for, pushing project costs to $2.5 million. The contractor would be liable for the additional costs required to build per the regulations. A properly designed professional liability insurance policy would respond, subject to the policy terms and conditions.

Additionally, if a third party was responsible for ensuring the ADA regulations were being complied and they did not have adequate coverage or limits, the contractor’s professional liability policy would potentially respond as secondary coverage.

Doesn’t my general liability insurance cover these claims?

Professional liability insurance coverage is designed to cover professional exposures typically excluded by commercial general liability (CGL) insurance. Standard CGL policies do not address economic loss or other issues of vicarious liability.

Professional liability insurance can provide the protection needed when claims of errors and omissions, such as negligent design, engineering, construction management or consulting services, arise. It can also be extended to include pollution and mold liability protection.

Contractors are at risk when promising to complete a project on time and within budget but then fail to do so. Missing a project deadline or coming in over budget may lead to an economic loss and a claim of professional negligence. The general liability policy typically excludes this loss or will have significant limitations on coverage and the limit of liability, if provided. A CGL policy should be considered to prevent a financial loss to the contractor.  

What does contractors professional liability (CPL) coverage cost?

CPL insurance premiums are based on how much risk a company has. This coverage can be very cost-effective and purchased on a practice basis (all the insured’s projects are covered) or on a project-specific basis.

How do I decide if I need professional liability insurance?

Together, you and your broker at The Miller Group can evaluate the professional risk to your business and determine if buying professional liability coverage is right for your company. Your broker is also a valuable resource for reviewing and negotiating your contracts. 

Professional Liability coverage has quickly become a necessity in contracting operations. Insurers report that their largest professional liability claims involve bodily injury, design defects, property damage or construction delays. In 2020, 45% of insurers reported claims worth $1-5 million.

The bottom line is that when something goes wrong on a construction project, the costs can reach exorbitant numbers. A single claim or lawsuit can be detrimental to a contractor of any size.

Even the best and most experienced contractors are vulnerable to mistakes or claims of liability. Should you be taken to court, a properly designed CPL policy combined with a CGL policy will help mitigate costs, provide third-party indemnification and cover other losses during a construction project. It might be just what you need to secure the future of your business.

About The Author

Susan E. Cash, CIC, CRIM, CISR

Susan E. Cash, CIC, CRIM, CISR
Email As Vice President of Commercial, Susan has more than 30 years of experience in the insurance industry. Susan advises clients in various industry sectors, including construction, manufacturing, nonprofit and real estate industries. She specializes in risk management, surety bonds, loss control and safety programs, claims, contract review and negotiation and financial reporting analysis.

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