In looking to get the right insurance to protect your construction business, you may come across the terms “Professional Liability insurance” and “Errors and Omissions (E&O) insurance.” You may ask yourself, “What’s the difference?”

For contractors, it’s essential to understand that these two terms refer to the same type of coverage and there is no practical difference between them. The distinction is primarily one of terminology, with different industries favoring one term over the other.

In this article, we’ll clarify what Professional Liability (or E&O) insurance covers for contractors, explain why this coverage is essential, and help you determine when you need coverage. We will also explain the difference between General Liability and Professional Liability insurance.

You’ll have what you need to make informed decisions as you grow your business in the Western U.S.

What Does Professional Liability, or E&O, Insurance Cover?

Small business Professional Liability insurance, also known as E&O insurance, generally protects contractors and construction businesses against allegations of professional mistakes or negligence that result in a financial loss for a third party. Financial losses may include project construction delays, cost overruns, and loss of property use.

Contractors Professional Liability insurance, depending on the policy coverage terms and conditions, typically covers defense costs, court costs, settlements, and damages that may arise if a client believes it was financially harmed by the contractor’s professional services or advice. It’s essential to note that the policy does not cover bodily injury or property damage; these losses are typically covered by General Liability insurance.

What Is Not Covered in a Professional Liability, or E&O, Policy?

Professional Liability (Errors & Omissions) insurance typically covers claims related to mistakes, negligence, or failure to perform professional services. However, there are important exclusions that contractors should be aware of:

  • Bodily Injury or Property Damage: Physical injuries or property damage claims fall under General Liability insurance, not a Professional Liability/E&O policy.
  • Fraudulent or Intentional Acts: The policy does not cover intentional wrongdoing, fraud, or illegal acts. For example, the policy will not cover those claims if a contractor knowingly provides substandard work.
  • Employment-Related Claims: Employee claims related to harassment, discrimination, or wrongful termination are not covered. Employment Practices Liability Insurance (EPLI) handles these types of claims.
  • Warranty Disputes: Product or service warranties are typically excluded from Professional Liability insurance.
  • Contractual Liability: Professional Liability, or E&O, insurance may not cover liability you assume under a contract unless the liability would exist without the contract. Be sure to review how your contracts align with your insurance policy.

What Is the Difference Between Professional Liability and E&O Insurance?

As noted, there is no difference between the two insurance policies. They both provide coverage in the event of a third-party financial loss because of alleged unsatisfactory work. The difference lies in how various industries refer to the policy.

The term “Professional Liability” is often used to describe professionals such as contractors, architects, engineers, real estate agents and brokers, notaries, and accountants, among others. Errors & Omissions is used for IT consultants, app developers, web designers, and cybersecurity firms. Law firms and healthcare providers (physicians, nurses, and surgeons) refer to this coverage as Malpractice insurance.

Why Should I Purchase Professional Liability Insurance?

There are several reasons why buying Professional Liability insurance is an essential component of a comprehensive small business insurance program for contractors:

  • Contract Requirements: Many projects require contractors to provide proof of Professional Liability or Errors and Omissions (E&O) insurance. The property owner or general contractor may choose not to proceed with using a contractor who is not insured.
  • Financial Protection: Without small business Professional Liability insurance, you could be responsible for any losses related to a claim, including legal fees, settlements, and awards.
  • Brand Protection: Your reputation is everything. You depend on referrals and your good name. With Professional Liability insurance, you can resolve disputes much more effectively with the support of legal counsel.

Who Needs Professional Liability or Errors and Omissions Insurance?

Contractors in every field need Professional Liability or small business E&O insurance, as their work often involves specialized knowledge, consulting, or design services.

  • Trade Contractors: Subcontractors like electrical engineers, HVAC consultants, roofers, masons, plumbers, painters, and many others can face significant financial exposure if the work is faulty or fails to meet project specifications, even if there is no physical damage.
  • General Contractors: They often provide project oversight, budgeting, scheduling, or professional recommendations and risk being held liable for alleged errors or omissions.
  • Design-Build Firms: Firms that combine design and construction services under one roof assume dual risk and require protection for both execution and design.

Choosing the Right Coverage

Work with an experienced agent in the construction industry who understands the exposures you face and the type of small business Professional Liability policy you need. There is no standard policy form and coverage differs from one policy to the next, so it’s critical you partner with an expert in insuring contractors.

You also want to ensure that you purchase sufficient coverage, which will depend on the project’s size, location, and other relevant factors. Also, take note of the deductible you select.

It’s essential to have your insurance with a financially strong insurance company. You want to work with an agent and company that will be responsive when you need coverage and in the event of a claim.

CCIS specializes in protecting the construction industry with bonds and Liability insurance products.

Frequently Asked Questions

Q. How is Professional Liability/E&O insurance different from a General Liability policy?

A. Professional Liability/E&O insurance is designed to protect against financial loss due to a mistake or negligence in the course of a contractor’s work, while small business Liability insurance protects against third-party bodily injury and property damage.

Q. Can I get a combined policy that includes both General Liability and Professional liability/E&O insurance?

A. Generally speaking, they are issued as two different policies.

Q. How do I provide proof of Professional Liability or E&O insurance to a client?

A. Ask your agent for a certificate of insurance (COI), which will provide proof of coverage. A COI typically includes the insured’s name, carrier, policy number, policy start and end dates, coverage limits, description of operations, and certificate holder (the party requesting the COI, like the GC or property owner). At CCIS, we provide fast COIs, understanding our contractor clients’ urgent need to move forward with a project.

NOTE: The insuring agreement in a policy sets out the covered perils, assumed risks, and nature of coverage that the insurance company provides to its insured in exchange for the premiums paid. Thus, the terms and conditions of the policy will dictate whether coverage exists and the nature of any potential benefits.