Contractors: Errors And Omissions Insurance

Errors and Omissions (E&O) insurance is a type of liability insurance that covers contractors against financial loss resulting from mistakes, errors, or claims of negligence. While general liability insurance covers claims related to injury or property damage, E&O insurance protects contractors from lawsuits related to financial loss. This type of insurance is particularly relevant for general contractors, who are ultimately responsible for the entire job and any mistakes made in executing the design. E&O insurance can provide peace of mind for contractors, knowing that they have coverage in place to reduce stress and anxiety if something goes wrong.

What is errors and omissions insurance?

Errors and omissions (E&O) insurance is a type of liability insurance that covers claims against your business for mistakes made or services not provided. It protects your business from claims of negligence, malpractice, errors, or omissions made while providing a professional service. E&O insurance helps pay for legal fees and any owed damages or settlements.

E&O insurance is also known as professional liability insurance and is designed to protect professionals when the services they provide lead to financial losses for a third party. Unlike general liability insurance, which covers claims related to injury or property damage, E&O insurance protects from lawsuits related to financial loss.

For example, if an electrical contractor failed to properly wire a building, resulting in costly repairs for the general contractor, E&O insurance would typically cover the electrician's attorney fees, settlements, and judgments.

E&O insurance is not usually legally required, but it is becoming more common for clients to request it as a condition of their contract. It can provide peace of mind for contractors, knowing that they have coverage in place should something go wrong.

The cost of E&O insurance varies depending on the size and nature of the business, but the average premium for a small business is around $735 per year. When deciding on an E&O policy, it is important to consider the nature of your business and the specific risks you want to insure.

What does errors and omissions insurance cover?

Errors and omissions (E&O) insurance, also known as professional liability insurance, is a type of liability insurance that covers claims against your business for mistakes, errors, or claims of negligence. While general liability insurance covers claims related to injury or property damage, E&O insurance covers lawsuits related to financial loss.

E&O insurance covers contractors against financial loss resulting from mistakes, errors, or claims of negligence. For example, an electrical contractor who failed to properly wire a building may cause a costly repair for the general contractor. However, E&O insurance would generally protect the electrician by covering attorney fees, settlements, and judgments.

In general, errors and omissions coverage for contractors provides protection for damages to a contractor’s completed work that occurs due to faulty workmanship, negligence, errors, or omissions. For example, a cement contractor pours a cement floor on a new construction project. A week later, the weather takes a turn for the worse, and the new floor is covered with snow and ice. To remove it, workers apply salt, which leaves marks on the concrete because it hasn’t cured yet. Contractors errors and omissions coverage would pay for labor and material costs involved in removing the damaged floor and pouring a new one.

E&O insurance can also cover your responsibilities when a subcontractor makes an error. For instance, a general contractor installed sewer lines improperly. He had to dig them out and reinstall them on his own dime, costing thousands of dollars in time and material. However, if he had E&O coverage, it would have covered the costs.

E&O insurance covers four common events:

• Errors made while performing services
• Omissions in completed work
• Negligence in work performed
• Incorrect professional advice provided

E&O insurance does not cover every situation that contractors may find themselves in professionally. For instance, while E&O usually covers negligence and mistakes, it does not cover illegal actions. Contractors are covered by E&O for a wide variety of mistakes, but violating the law will generally invalidate an insurance claim.

Events typically not covered by E&O insurance include:

• Illegal actions, often regardless of intent
• Discrimination or harassment, which requires employee practices liability insurance
• Bodily injury or property damage, which is instead covered by general liability insurance
• Employee injury or illness, which is covered by workers’ compensation insurance

What doesn't it cover?

Errors and Omissions (E&O) insurance is a form of liability insurance that covers claims against your business for mistakes, negligence, errors, or services you failed to provide. However, it's important to note that E&O insurance doesn't cover every situation that contractors may encounter. Here are some things that are typically not covered by E&O insurance:

• Damages to work in progress or completed work: E&O insurance does not cover damages to work that is still in progress. It also does not cover damages to a contractor's completed work, which is typically covered by general liability insurance.
• Intentional acts or illegal actions: Damages resulting from intentional or illegal acts, such as knowingly substituting substandard materials, are not covered by E&O insurance.
• Subcontractor work: E&O insurance covers the insured contractor's liability for a subcontractor's error. However, the subcontractor themselves are not covered by the contractor's E&O insurance and would need their own separate coverage.
• Bodily injury or property damage: E&O insurance does not cover bodily injury or property damage. These types of claims are typically covered by general liability insurance.
• Employee injury or illness: Claims related to employee injury or illness are not covered by E&O insurance. These types of claims would typically be covered by workers' compensation insurance, which is usually a legal requirement for businesses.
• Employment-related issues: E&O insurance does not cover employment-related acts such as wrongful termination, discrimination, or harassment. A separate employment practices liability insurance policy is needed to cover these types of issues.
• Intellectual property violations: Claims related to patents or other intellectual property violations are generally not covered by E&O insurance. A general liability insurance policy may offer some protection in these cases.
• Data breaches or theft of sensitive data: E&O insurance does not cover data breaches or the loss or theft of personally identifiable information. A separate data breach insurance policy would be needed to cover these types of incidents.

How much does it cost?

The cost of errors and omissions insurance for general contractors depends on a variety of factors, including the size of the business, the industry, the scope of work, and the coverage limits.

The average premium for errors and omissions insurance is about $60 per month, or $735 annually, for small businesses. Most policyholders can expect to pay between $50 and $100 per month for their errors and omissions insurance coverage. However, the cost can vary widely depending on the specific circumstances of the contractor.

For example, the cost of an errors and omissions policy is typically based on revenue, with a contractor with $1 million in annual revenue expected to pay around $10,000 in premiums. This equates to approximately 1% of revenue, which is the standard rate for errors and omissions insurance. However, employee headcount may also be considered, with a higher number of employees leading to higher premiums.

Additionally, the type of contract or project undertaken by the contractor will impact the cost of their errors and omissions insurance. A policy underwriter will assess the contractor's past and expected revenue, as well as the types of contracts they usually sign, to determine the coverage limits and costs. The policy costs will start with a base rate, which is then adjusted based on revenue, add-on coverages, lower deductibles, and higher coverage limits.

It is important to note that errors and omissions insurance is just one component of a comprehensive insurance strategy for contractors, who may also need to consider other types of insurance such as general liability insurance, worker's compensation, and subcontractor default insurance, among others.

Is it the same as professional liability insurance?

Errors and Omissions (E&O) insurance is also called professional liability insurance. The two terms are interchangeable and refer to the same type of insurance coverage.

E&O insurance covers contractors against financial loss resulting from mistakes, errors, or claims of negligence. It is a type of liability insurance that protects against claims related to professional negligence. It covers professionals when the services they provide lead to financial losses for a third party.

General liability insurance, on the other hand, covers claims related to injury or property damage. It does not cover faulty work or negligence related to the professional services or advice provided. That is where professional liability or E&O insurance comes in.

E&O insurance is not usually a legal requirement, but it is becoming more common for clients to require it as a condition of their contract. Many construction professionals take out an E&O policy to protect themselves against potentially devastating financial losses resulting from negligence.

The cost of E&O insurance varies depending on the size and nature of the business, but the average premium for a small business is around $735 per year.

Frequently asked questions