Errors and omissions insurance protects companies from claims if a client holds it responsible for errors or the failure of the work to perform as promised in the contract. Independent insurance consultant Scott Simmonds compares it to malpractice insurance for physicians.
Policies vary, but most remodelers have general liability insurance that covers property damage or on-site injuries. In addition, architecture and engineering firms usually carry errors and omissions insurance. However, some larger remodelers have also researched the need for E&O insurance to protect their firms against work failure.
ADDITIONAL COVERAGE Mike Denker, vice president of Hopkins & Porter Construction, in Potomac, Md., says his design/build firm periodically reviews E&O insurance policies to decide if it wants to add the insurance to the company's existing coverage. “We have an architectural staff, so this issue has come up a number of times. At one point, we purchased [E&O insurance] for one architect who was worried about it, even though he was on staff and his work was covered by us,” Denker says.
After investigating the costs and coverage with its insurance company, Hopkins & Porter Construction's management decided against getting the insurance. The insurance company wanted the firm to purchase E&O insurance based on H&P's entire volume of work, not just on its architectural work. Denker says that this would have made it difficult for his company to compete on price with stand-alone architecture firms.
“As a design/build firm, we have one point of accountability. If there are issues, we take care of them. And, we build everything we design,” he says. “I think [E&O insurance is] a bit of overkill for residential construction.”
CLEAR UNDERSTANDING Attorney Steven Silverberg, partner with Silverberg Zalantis, in White Plains, N.Y., says some municipalities identify specific types of insurance that are required for contractors that apply for building permits, so check that you're meeting the minimum obligations in your area. Also, even if remodelers do not purchase E&O coverage for themselves, they should make sure the architects and engineers they work with have the insurance. If the remodeler does decide to purchase it, Silverberg says, “make sure the policy is written to cover exactly the type of activity you are engaged in and that the broker or agent understands the nature of your business.”
Simmonds says construction industry coverage is complicated due to the nature of the work, so remodelers who want this coverage should start with the agent who is providing their general liability insurance. “That agent knows the gaps in your policy. You don't want to duplicate coverage, but there is a huge potential of leaving holes if you do not look at both policies at the same time,” he says. Companies with in-house architects will need coverage for both the architectural and construction exposure.
Simmonds says owners should ask a lot of questions, including explaining potential scenarios to the agent because, he points out, “It's through these examples that you will understand your coverage.” Also focus on the section of the policy that covers exclusions.
Since E&O insurance can be expensive, to save money, Simmonds suggests a policy with a high deductible: “Mitigate the expense by putting some skin in the game through a deductible.” He says that the relationship a remodeler has with his insurance agent is critical; they work as a team: “The agent, contractor, and I all work together to find the right policy.”