In today’s competitive environment and uncertain economy, contractors need the right insurance coverage to help safeguard against their toughest risks. For specialty contractors like you, this means coverage designed to ensure against potential liability exposures — which can arise from a variety of factors and take years to materialize. Businesses today are taking more precautions when it comes to project specifications, budgetary constraints and timelines. And customer expectations are becoming increasingly high. That often means added pressure for your company to complete jobs on time and on budget. Unfortunately, risks can quickly turn into costly errors, placing a project or your business into a challenging situation. That’s why more contractors are seeking out contractors errors and omissions policies, aimed at insuring against a variety of risks, including claims alleging faulty workmanship, design errors or omissions and the use of defective materials or products.
Commercial General Liability Coverage Is Not Enough
While most contractors have a commercial general liability policy, this type of coverage was never intended to serve as warranties of work. Damage to self-performed work is considered to be a “business risk” and is excluded in most situations. Exceptions would be damage to property that is not the work itself or, possibly, damages caused by or to the work of a subcontractor done on behalf of a general contractor.
Many insurance carriers have long held that faulty workmanship never satisfies the commercial general liability insuring agreement. Because there is no accident, no property damage that could therefore be considered a covered “occurrence.” Case law is often split by state on this issue. Since 2005, at least 20 jurisdictions have issued decisions to support defective construction as an “occurrence” with respect to damage to property other than the work itself. Courts in other states, such as Arkansas, Hawaii, Pennsylvania, South Carolina and Ohio, have ruled that faulty workmanship is not an occurrence. To add another layer of complexity, and in response to those court decisions, South Carolina and Arkansas joined other states in enacting legislation to support the opinion that faulty workmanship, which causes damage to property that is not the self-performed work, is indeed a covered occurrence.
While court decisions may change how commercial general liability policies are construed, insurance carriers do offer endorsements to clarify that the exceptions to work exclusions, and damage to property that is not the work itself, are deemed to be an occurrence. Compact equipment contractors should partner with brokers and carriers that can properly explain these options and whether they are even needed in a particular state.
Are You a Good Fit for Contractors Errors and Omissions Coverage?
Professional liability policies were historically designed to protect firms against risks beyond the coverage of their general liability policies — specifically claims resulting from design errors and omissions. Today, however, professional liability policies have evolved into a more robust contractors errors and omissions policy that expands coverage to include faulty workmanship and the use of defective materials and/or products. As a compact equipment contractor, it is important that you understand the limitations and benefits of professional liability policies, for both your firm and the design professionals you are hiring. More and more contract requirements are emphasizing the need for this type of coverage, which signals the need for additional in-depth coverage. There are a few simple questions that you can ask yourself to help you better determine if you are a good fit for contractors errors and omissions coverage:
• Are you a contractor with the responsibility to perform construction services?
• Do you install products in the course of your construction services?
• Do you provide in-house design with construction responsibility?
• Do you subcontract design services to other parties and self-perform the construction work?
• Do you provide value engineering services?
If you answered “yes” to any of these questions, you have a unique exposure that can be addressed through a tailored errors and omissions policy.
Protect Your Company’s Reputation
In a competitive marketplace, your company survives and thrives on its reputation. Allegations of faulty workmanship, design errors or omissions and the use of defective materials or products can not only put your company’s good name in jeopardy, they can also ultimately have a significant impact on your bottom line.
Let’s examine a potential design error claim scenario to highlight the value of a solid contractors errors and omissions policy. New Line Cabling Inc. was hired to install an underground coax cable and internet system for a large office complex in an early phase of construction. The complex would have 12 separate offices, each of which required underground wiring and exterior receptacles, for a total job cost of $200,000.
Following installation and before construction completion, the coax system was tested by a technology infrastructure engineer. The system failed, and an investigation determined that the coax cable called for in the design was not appropriate for underground burial — it was rated for above-ground-only systems and inadequate for underground shifts in temperature. Reinstallation would cost $150,000. Most standard commercial general liability policies would not cover the cost to replace the cable. In this case, New Line Cabling would be responsible for pursuing its own claim against the design engineer. However, if the firm had errors and omissions coverage within its insurance policy, it would have immediately covered the complete cost of the reinstallation, allowing New Line Cabling to uphold its commitment to a very important customer. The company’s insurance carrier could then subrogate against the design engineer for faulty workmanship.
Get Prepared with the Right Coverage
With many errors and omission claims similar to the New Line Cabling example, insurance carriers like CNA have taken steps to recognize the coverage need for what had previously been considered a pure business risk. CNA’s Contractors Errors and Omissions and Pollution Liability (CEO) policy was developed in response to a number of requests for a product to address construction errors and omissions. As the contracting landscape evolves, issues regarding faulty workmanship, design errors and omissions and the use of defective materials or products will continue to grow more complex. You need to ensure your broker and insurance company is working in partnership to fully understand and address your coverage needs. That includes making sure you have the insurance to address an exposure from errors or omissions in construction that may cause damages not covered by the ISO Commercial General Liability (CG 0001) form or traditional professional liability forms.
If you have any questions regarding contractors errors and omissions coverage, contact Michael G. Farrington, CRIS, program underwriting director, CNA Construction Segment, at 410.453.4428 or email@example.com.
Any examples in this article are for illustrative purposes only and any similarity to actual individuals, entities, places or situations is unintentional and purely coincidental. This material is not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations or to provide an acknowledgement that any given factual situation is covered under any CNA insurance policy. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. CNA is a registered trademark of CNA Financial Corp. Copyright © 2015 CNA. All rights reserved.Tags: Business Protection, CNA, Contractors Errors and Omissions Coverage, March 2015 Issue