Opinion: The case for errors and omissions liability insurance

Jeff Chronister

In my 25 years as a commercial risk adviser, I have been asked many times: “Why should I buy errors and omissions liability insurance? What does it really cover anyway?” The answer is as complex as the coverage itself.

There is a long list of potential professional risks for contractors that are limited or excluded from the standard, unendorsed general liability form including breach of contract, breach of warranty, negligence, misrepresentation, design errors, defense costs and a customer’s financial loss due to your error.

In addition to protection, should any of the above occur, many owners and general contractors now require subcontractors to carry E&O insurance as a condition of contracting, ensuring they have recourse if issues arise with the subcontractor’s work.

The E&O policy provides the following:

1. Financial stability. A large claim due to a mistake could significantly impact a subcontractor’s finances, while insurance can help cover settlements or judgments.

2. Reputation management. Having E&O insurance can demonstrate professionalism and commitment to quality work, potentially enhancing a subcontractor’s reputation and attracting more clients.

3. Potential for complex projects. Construction projects often involve intricate details and potential for errors.

In the construction industry, trades that most need E&O coverage include electricians, plumbers, HVAC technicians, roofers, structural engineers, architects and any trade involved in complex design or installation work. Their services can potentially lead to significant damages if mistakes are made, often requiring professional liability protection.

If you are a trade contractor who strictly follows project plans without providing any input on value engineering, a professional liability policy may not be necessary. However, if your company has an in-house engineering division or regularly offers cost-saving recommendations to clients, it’s wise to consult with your insurance agent about exploring coverage options and obtaining quotes.

You may be wondering how much this coverage will cost and what limit you should buy.

As a commercial subcontractor in 2025, it’s generally recommended to carry at least $1 million per occurrence in E&O insurance, with a matching aggregate limit, depending on your industry, project size and the potential financial impact of a single mistake. However, review and assess your particular risk profile to determine the best coverage for your specific situation.

Here are some key factors to consider when choosing your E&O coverage limit, and these also factor into the underwriters’ terms and pricing:

1. Project complexity. High-risk or complex projects may require a higher coverage limit, which will in turn have a higher premium attached to it.

2. Client size and value. If you work with large clients on high-value projects, a higher limit may be necessary.

3. Industry/contract standards. Check what is considered standard coverage within your specific industry.

4. Local regulations. Some regions may have specific requirements for E&O coverage.

Other important points to consider about E&O insurance include the following:

1. Per-occurrence vs. aggregate limit. The per-occurrence limit is the maximum payout for a single claim, while the aggregate limit is the total amount your policy will pay out during the policy period.

2. Per-project or per location aggregate. It’s difficult to get on E&O but provides a separate aggregate limit for each ongoing project or location.

3. Review your contracts. Many general contractors will require E&O coverage limits for subcontractors. Generally, the pricing is based on the contractor’s annual revenues or employee payroll/headcount. If losses have occurred in prior years, those will have an impact on pricing as well.

Claims made vs. occurrence-based
This article is too limited to go into the differences in these two different policy types, but most E&O policies will be claims-made policies. This type of policy pays claims that occur in the policy period and back to the retroactive date. However, once the policy is cancelled or not renewed, the insured will lose the coverage for that period all the way back to the retroactive date.

By contrast, the occurrence-based policy is permanent and will stand up in the future to pay claims that occur during that particular policy period. Think of an occurrence policy as permanent insurance where the claims-made policy is renting insurance; as long as the rent is paid you have coverage. The moment the premium isn’t paid, the coverage disappears. (Unless you buy a “tail,” which is a topic for a different article.)

Jeff Chronister is a senior commercial risk adviser for Ollis/Akers/Arney. He can be reached at jeff.chronister@ollisaa.com.