Errors and Omissions Insurance for contractors protects the value of a contractor’s work from damage caused by mistakes and negligence.
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What is Errors and Omissions Insurance for contractors?
Contractors Errors and Omissions Insurance (Contractors E&O) is a type of liability insurance for trade contractors such as plumbers, electricians, HVAC contractors, painters, carpenters, and others. Contractors E&O protects the value of the work that you do if it is damaged due to unintentional faulty workmanship. Your commercial general liability policy will protect you from damages that your work causes to other property, but your company’s work is excluded from commercial general liability coverage.
- Your electrician business completes an electrical wiring job for a large building. The cost of the job, including materials, is $20,000. Several months after you complete the job, a mistake in wiring causes a fire in the electrical box that severely damages the building and destroys your electrical work. The damage to the building would be covered by your commercial general liability policy, but the damage to your electrical work is excluded. If your company had Contractors E&O coverage, the additional $20,000 loss to your company’s work would also be covered.
What does Errors and Omissions Insurance cover?
Contractors E&O only covers damage to your work, product, or impaired property that occurs after the job is complete and that results from your negligence, errors, or omissions. In the event that your company is held liable, E&O would cover the cost to repair or redo faulty work, as well as any legal defense against those claims. Importantly, Contractors E&O is distinct from professional liability insurance, which covers errors in design or advising.
Traditionally, Contractors E&O coverage was intended for general contractors and other larger businesses. It wasn’t affordable for small contractors such as plumbers, electricians, HVAC contractors, painters, and carpenters, despite customers becoming more demanding and escalating more complaints into claims and lawsuits. To respond to the need, insurers in recent years have started to offer Contractors E&O insurance for smaller contractors with a range of deductibles and limits.
- An HVAC contractor installs the wrong model of an air conditioning system in a school. Because of the model mismatch, the unit is overworked and the compressor burns out.
- An electrician crosses the wiring for a job and causes an explosion that destroys his electrical work.
- A plumber mistakenly connects a galvanized metal pipe directly to a copper pipe, which causes corrosion and affects the entire line of piping he just installed.
What doesn’t Errors and Omissions insurance cover?
Contractors Errors and Omissions Insurance is intended to help cover some of the gaps left by the commercial general liability policy. Contractors Errors and Omissions Insurance doesn’t duplicate coverage for damages that the commercial general liability insurance policy already covers. This includes liability for:
- Bodily injury
- Property damage
- Personal and advertising injury
- An employee of a contracting firm fails to install a bolt in the correct place for a residential housing project, which causes the roof to collapse after the construction is completed. The owner of the home is injured by the collapse and files a lawsuit to recover her medical expenses. Although the injury was caused by an error in the contractor’s work, Errors and Omissions Insurance will not cover the damages because it is bodily injury covered by the general liability policy.
Contractors should take note, however, that having both the commercial general liability policy and the Errors and Omissions policy doesn’t mean your business will be covered for every liability. It’s important to carefully analyze what is included and excluded in both policies to determine where coverage gaps remain.
Contractors Errors and Omissions Insurance also does not cover intentionally dishonest acts that cause damage to the value of the work. Let’s say a contractor knowingly substitutes cheap materials or otherwise cuts corners to save money and it results in damages to the value of the work. The resulting damages will not be covered by Contractors Errors and Omissions Insurance.
- Example: To save money, a contracting firm installs a substandard plumbing system instead of the one they are contracted to install, hoping that the building owner will not notice. When the plumbing causes building-wide leaks a few months later, it costs an additional $300,000 to replace the substandard system with an effective one. The building owner files a lawsuit against the contractor. However, because the contractor intentionally cut corners, the replacement of the plumbing system will not be covered by the contractor’s Errors and Omissions Insurance.
Work in Progress
Errors and Omissions Insurance for contractors only applies to damages to the work and the product when the work is completed, so any work that is still in progress won’t be covered. For coverage of work that is in progress, consider purchasing an installation floater.
- Example: A contractor makes a mistake installing the electrical wiring of a new cooling system for a residential home and shorts the system while he has only completed half the work. It costs $20,000 to redo the work, but because the work was not complete and relinquished at the time of the damage, Errors and Omissions Insurance for contractors will not cover it.
Work done by subcontractors is usually not covered and you may want to encourage your subcontractors to secure their own Errors and Omissions Insurance. Coverage is limited to the contractor’s owners and employees, including partners, executive officers, directors, managers, and workers.
For Contractors E&O underwriters, the highly variable quality of subcontractors makes it risky to underwrite. Some contracting firms may hire reputable subcontractors while others may retain the services of the lowest bidder. By excluding subcontractors from coverage, underwriters can more easily predict the risk associated with this coverage.
What is a claims-made basis?
Contractors Errors and Omissions Insurance policies are written on a claims-made basis, meaning that the insurance coverage is triggered when the claim is made, rather than when the error, omission, or negligent act took place. However, it’s important to note that many claims-made policies have a retroactive date. Acts that took place before the retroactive date are not covered even if the claim is made while the policy is active.
- As a carpet installer, you have a Contractors Errors and Omissions policy for the year 2018 and a new policy for the year 2019. You install the wrong type of carpet in a residential home that you’re contracted to work on in 2018, but the homeowner doesn’t discover it until 2019 when he files a claim. The policy in place in 2019 when the claim was made will pay for the damages, not the one in 2018 when the negligent act occurred.
What are the deductibles and limits for Contractors E&O Insurance?
For Contractors E&O insurance, you will have a deductible per job, a limit per job, and an annual aggregate limit. For example, you could have a $750 deductible per job and a $5,000 limit per job and an annual aggregate of $30,000.
How broad is the coverage?
There is no standard form for Contractors Errors and Omissions Insurance. Some insurers will offer broad coverage while others will offer much more narrow coverage. Generally, insurers will write the policy to cover the activities that you specialize in. If you are a plumber, the insurance policy will cover plumbing and related work. If you also do heating and cooling and electrical work on the side, your Errors and Omissions policy may not cover these types of jobs unless you inform your insurer and write it into the policy.
How much does Errors and Omissions Insurance cost?
The cost of Errors and Omissions Insurance depends on a number of factors, including the type of business you run, your industry, and coverage limits. While the range of pricing can vary widely, most small business owners can expect to pay annual premiums between $400 and $1,000.
What is the difference between Errors and Omissions Insurance for contractors and professional liability insurance?
Contractors Errors and Omissions Insurance should not be confused with professional liability insurance for contractors. Professional liability insurance covers your client’s economic losses caused by work errors, undelivered work, misrepresentation, or negligence on the part of the contracting firm, typically to cover exposures from construction management and design-build work. Meanwhile, Contractors E&O covers property damage to your own work or product caused by errors, omissions, or negligence.
While commercial general liability policies cover many of the liabilities a contractor can face while working on a project, it does not provide coverage for damage to the contractor’s own work or product due to mistakes or negligence. Errors and Omissions Insurance for contractors fills that coverage gap for contractors, plumbers, electricians, HVAC contractors, painters, carpenters, and others, though key exclusions include intentional acts, subcontractors, and work in progress. It’s also important to understand the breadth of coverage as E&O insurance for contractors is often specialized to your particular trade.