There are compelling reasons why a contractor should carry professional liability (PL) insurance. As contractors work on increasingly complex projects and assume a broader range of responsibilities, the exposures they face can create significant financial risks. Professional liability insurance coverage provides the following:
Protection against financial losses due to negligence
This is the core benefit of a PL insurance policy. If a client claims that professional services, such as design, planning, or construction management, performed by or for the contractor caused them financial harm due to errors, omissions, or negligence, a PL policy can cover legal fees, settlements, and judgments up to the policy limit.
Coverage for the gap in general liability insurance
While general liability insurance covers bodily injury and property damage, it typically excludes financial losses from professional services. With contractors providing new levels of design assistance, delegated design, and design-build services on construction projects, PL insurance offers coverage for this crucial exclusion from a contractor’s general liability insurance policy.
Defense a contractor needs
One of the greatest values of having a PL policy is the defense it provides against a claim—even if the claim has no merit. Anecdotal evidence from industry attorneys suggests that when a client or third party is aware that a company has a policy with a robust defense obligation, they are less likely to bring a baseless, inconsequential, or vindictive claim against a contractor. Not every professional liability claim brought against a contractor triggers a recovery; the ability to fight against a claim leads to many claims being withdrawn.
Increased competitiveness and client confidence
When a contractor carries PL insurance, it is a demonstration of the company’s commitment to risk management. In a competitive marketplace, acknowledging potential exposures and insuring against them can help make a contractor a more attractive choice for clients with larger or complex projects because it is an indication of the contractor’s professionalism and understanding of an increased involvement in project success.
Aids in keeping the relationship between the parties productive
If a problem does occur for which the contractor has responsibility because of its negligent performance of professional services, a PL policy can work to solve the issue quickly, keeping the project moving forward and the relationship between the contractor and client on a productive and respectful basis.
A contractor’s PL policy can cover a wide range of potential claims, including:
- design errors or omissions by the contractor or a design firm working for the contractor;
- failure of delegated design elements to comply with building codes or regulations;
- design deficiencies resulting in scheduling delays or cost estimates causing budget overruns;
- negligence in the oversight of design-build subcontractors leading to faulty work; and
- misinterpretation of plans or specifications.
Without a properly structured PL policy, a contractor could be personally liable for any financial losses arising from claims related to design responsibility, potentially jeopardizing personal assets and financial stability. Knowing that professional liability protection is in place can provide valuable peace of mind, allowing a contractor to focus on delivering quality work without constant fear of potential lawsuits.
Overall, carrying PL insurance is a vital step for contractors to manage risk, protect their business, and maintain client confidence. The policy provides an essential financial safety net in the ever-present possibility of claims arising from errors or omissions during the complex process of construction projects.