Professional Liability Insurance Explained

Professional liability insurance provides contractors coverage from financial losses that happen as a result of their errors, mistakes, or negligence. Unlike general liability insurance — which protects contractors when their work leads to bodily injury or property damage — professional liability offers coverage in situations when their work causes another party to lose money.

For instance, a plumber who fails to properly lay a pipe could cause water damage that leads to an expensive repair for the general contractor. In that case, professional liability insurance would generally provide the plumber with reimbursement for legal fees, settlements, and judgments. 

Professional liability insurance, also called errors and omissions (E&O) insurance, is a form of risk transfer, meaning that the policy mitigates the risk a contractor faces in their line of work. Even though professional liability is not usually required for most contractors, it’s extremely common to take out this kind of insurance policy to avoid the devastating losses that could come from a lawsuit. 

What is professional liability insurance?

Professional liability insurance protects against claims related to professional negligence. Also referred to as errors and omissions insurance, professional liability covers professionals when the services they provide lead to financial losses for a third party. 

When a contractor enters into a construction contract, they agree to fulfill a certain set of requirements for another party—often a general contractor. When the contractor breaches the contract by committing a mistake or otherwise performing negligent work, professional liability insurance can help cover the financial losses that were caused by the contractor’s errors. 

This type of coverage is called “third-party insurance,” since unlike many other types of insurance, professional liability covers another party’s losses rather than the policyholder’s. 

Because construction workers and tradespeople perform complicated and risky work, the possibility of making a mistake is high. Some mistakes could lead to bodily injury or property damage — which are both covered by general liability insurance. Other mistakes, however, could lead to financial losses for an owner or another contractor, and that’s where professional liability offers additional important coverage. 

Professional liability insurance vs. errors and omissions insurance

Nowadays, both professional liability insurance and errors and omissions insurance refer to the exact same coverage. “Professional liability” is a newer term that emerged to highlight the fact that these policies often cover extra bells and whistles, like reputation, repair costs, travel costs, subpoena coverage. However, errors and omissions insurance and professional liability insurance are identical, and the terms are used interchangeably in the construction industry. 

Whether an insurance carrier uses the term errors and omissions or professional liability, contractors looking for this kind of coverage should be careful to review the entire policy to ensure the services they need are included.  

Who needs professional liability coverage?

Insurance covering errors and omissions exists for professionals in nearly every field — from accountants and lawyers to doctors and electricians. In construction, professional liability policies exist for almost every trade and specialty, including:

• General contractors
• Roofers
• Masons
• Plumbers
• Electricians
• Carpenters
• Concrete contractors
• Sheet metal contractors
• Painters
• Architects
• Engineers
• Home inspectors

While professional liability insurance is usually only legally required for architects, engineers, and home inspectors, essentially every contracting business can benefit from adding professional liability coverage to their slate of insurance policies. A single lawsuit related to professional negligence can financially ruin a contracting business. Maintaining adequate E&O coverage offers additional protection beyond what general liability insurance provides. 

What does professional liability insurance cover?

For the most part, all professional liability insurance policies offer the same basic coverages, ensuring that contractors are protected when their work leads to financial losses.

For example, the following situations are generally covered by a professional liability policy:

• Errors made while performing services
• Omissions in completed work
• Negligence in work performed
• Incorrect professional advice provided

In short, contractors who commit errors in their line of work are covered by professional liability insurance when they are sued for financial losses. However, the exact kind of coverage that contractors receive will vary based on their trade and specialty. 

A professional liability policy will only cover a contractor for the scope of work they perform within their specialty, and exclusions to coverage are typically based on the risks faced by particular trades. Importantly, the base coverage is usually at the beginning of the policy while exclusions are listed toward the end, so contractors need to be careful to ensure that they have coverage for the situations they face in the course of their work. 

For example, a professional liability policy for plumbers may have different coverages and exceptions than a policy drafted for a mason, since the two trades perform different services.

It's important to review a policy contract carefully to ensure that it has the coverage needed to protect a contracting business against potential lawsuits. 

What does professional liability insurance not cover?

While professional liability is a broad form of insurance, it does not cover every possible situation that contractors could face. Most importantly, while professional liability covers negligence, it does not cover intentional mistakes or illegal actions. 

Here are some situations that are not covered by professional liability insurance:

• Illegal actions, often regardless of intent
• Discrimination or harassment, which requires employee practices liability insurance
• Bodily injury or property damage, which is instead covered by general liability insurance
• Employee injury or illness, which is covered by workers’ compensation insurance (typically a legal requirement of running a business)

Outside of these very broad categories, a variety of exceptions may be included in a specific professional liability policy depending on the insurance carrier and the trade or specialty, so reading the contract fully is paramount to ensure that necessary services are covered. 

How much does a professional liability policy cost?

A contractor can expect a professional liability policy premium to cost approximately 1% of annual revenue, though the actual cost can vary widely depending on a variety of factors, including geographical region, trade or specialty, and claim history. When an underwriter is looking at coverage limits and costs, a contracting company’s financials typically dictate the policy cost.

The cost of a professional liability policy is typically based on revenue, though employee headcount may come into consideration in some cases. A policy underwriter will generally look at a contractor’s past and expected revenue, as well as the types of contracts a business usually signs. 

Policy costs typically start with a base rate, which is then modified by factors like revenue as well as add-on coverages, lower deductibles, or higher coverage limits. In essence, the underwriter tries to determine a cost that anticipates the potential risks the contractor faces in the course of doing business.  In some cases, insurance carriers are able to provide both general liability and professional liability insurance in a bundle that costs less than buying both policies separately.

What other insurance do contractors need?

Professional liability insurance is just a single piece of the insurance puzzle that helps contractors manage the risk associated with complex construction work. A variety of insurance policies—some legally required and others optional — serve as a form of risk transfer, meaning that they shift risk away from the contractor and onto insurance companies. While insurance costs may seem burdensome to many contracting businesses, the protection from damaging lawsuits and hefty settlements is ultimately worth it. 

Some other forms of insurance that are key for construction businesses include:

• Workers' compensation
• General liability
• Builder’s risk
• Subcontractor default insurance
• Inland marine

With a proper insurance strategy, businesses will be able to stay cash flow positive even after incidents involving financial losses, injuries, or property damage.

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