Today’s customers are more demanding than ever, and they’re quick to claim negligence when dissatisfied with the results of a contractor’s work. Any complaint can turn into a costly dispute, and too often a small business must spend its own time and money to fix the problem.
Many small contractors think their general liability insurance policy covers errors and omissions (E&O) claims. However, that’s usually not the case because most general liability policies specifically exclude losses resulting from “your work, your product or impaired property” when applied to wrongful acts related to contractor services. Because an E&O claim can cost a small contractor $5,000 or more, this coverage gap is a serious threat to its profits, and possibly its survival.
Many plumbers, electricians, painters, finish carpenters and other specialty trade contractors need additional E&O insurance to cover the types of claims and losses they’re likely to encounter. E&O policies help mitigate risks and pay for costs associated with a covered negligence claim.
Previously, E&O coverage was geared toward larger businesses, such as general contractors, and priced accordingly. But recently it has become more available to, and affordable for, the two million U.S. small contractors.
The following loss scenarios represent the types of claims E&O insurance can cover.
- Carpet installer. A flooring contractor picks up the wrong carpet at the dealer and mistakenly installs it in a customer’s home. The installer has to remove the incorrect carpet and replace it with the correct product. Total contractor loss: $3,000.
- Fence erector. A fencing contractor misreads the site plan and installs a fence significantly beyond the customer’s property line. The fence has to be removed and rebuilt. Total loss: $35,000.
- Lawn care service: A landscaping contractor applies the wrong chemical to the lawn at a corporate office park. All the turf dies and needs to be removed and replaced with new sod. Total loss: $17,000.
- HVAC technician: When installing a new cooling unit on the roof of a commercial building, a technician fails to properly complete the foundation support. The unit breaks through the roof, destroying the equipment and resulting in significant damage to the building and personal property. Although the property damage is covered under the contractor’s general liability policy, the contractor’s uncovered errors and omissions are not. Total loss: $25,000.
- Appliance installer: A laborer incorrectly wires a 220-volt receptacle, causing a new commercial-grade oven to malfunction. The oven is damaged and a new unit needs to be installed. Total loss: $6,750.
E&O coverage for small contractors already is expanding as a result of market demand. Some insurers broadened eligibility to include HVAC dealers and distributors, janitorial contractors, locksmiths, septic tank cleaners, masonry contractors, and interior tile and stone artisans.
Although the latest E&O policies are designed for small contractors, the benefits also extend to larger businesses that hire subcontractors. With separate E&O coverage purchased by a subcontractor, it’s easier for a general contractor to manage the risk seamlessly throughout a project’s life cycle.
To capitalize fully on E&O coverage, contractors should work with a qualified insurance agent or broker who can help them understand the risks and choose the most appropriate product. In today’s litigious environment, E&O coverage provides financial protection at an affordable price.