Why do you need Contractors E & O Insurance for your contracting business?
What do you need to be concerned about with Contractors E & O Insurance (Errors and Omissions)?
After Hurricane Katrina devastated New Orleans, some contractors were using foreign made drywall to do the repairs. They had to use it due to the lack of materials available in the US.
Soon after the repairs were made, it was discovered that this drywall was faulty. Several contractors were sued. Then they had pay up or go in and repair the work that was done due to this faulty product.
Unfortunately, they discovered that there was no insurance coverage for this under the general liability insurance policy. Faulty workmanship and “your work” exclusions were cited, and insurance coverage was denied.
This led to the invention of a relatively new insurance coverage, contractors E & O insurance.
Contractors E & O is usually a claims made insurance policy. This means that the insurance policy that is in effect when a claim is made is covering the claim. This is true regardless of when the claim occurred. But only as long as the claim occurred after the retroactive date of the current insurance policy.
What is a retroactive date?
A retroactive date is the date from which uninterrupted coverage is held or a date in the past for which an insurer agrees to cover.
Any claims arising from events prior to the retroactive date is not covered.
What can contractors errors and omission insurance cover?
As a contractor, you can be exposed to potential losses for damage to your work, loss of use due to the impaired property, design errors even if you have an excellent general liability insurance coverage.
Contractors professional liability insurance coverage is available to address potential coverage gaps in the policy form.
Since Contractors E & O insurance coverage is so new, each carrier is using their own coverage forms. This causes differences in the forms which can be costly to you at the time of a claim.
Some policy form differences we saw are as follows:
- Defense inside of policy limits vs Defense outside of policy limits. Example: Assume you have $100,000 in coverage and the judgement is $100,000 and it cost $25000 to defend. With defense inside the limit you would be left with $25,000 not paid. This is because the $25,000 defense cost is part of the $100,000 total coverage limit. With defense outside the limit they would pay the $100,000 judgement and the $25,000 in defense.
- Hammer Clause vs No Hammer Clause. Example: There is a claim and the company feels that they can settle the claim for $100,000. You feel that you did nothing wrong and do not want them to settle the claim. If there is a hard hammer clause in your policy, then the company has no obligation to continue defending you in the case. Therefore you are responsible to pay for continuing defense costs and any additional judgement that may come on over the $100,000 settlement amount. If there in no hammer clause, then the company will continue to defend and pay any judgement increases, subject to the limits on your policy.
- Some policies include coverage for limited job site pollution liability coverage, which includes things like bodily injury, property damage, clean up costs and claims expenses associated with a pollution claim.
- Retro active date. If you are switching companies and have contractors errors and omissions insurance, make sure the retroactive date on the new policy lines up with your old policy. If they do not match up, you could be opening yourself up for a possible uncovered claim.
- Do you need to purchase “tail” coverage from your old policy? If you are moving your E & O insurance, and the new company will not go back and offer a retroactive date, then you may need to purchase extended reporting period coverage (or tail coverage) on your old policy.
Example for issues that can arise from a claims made policy with improper retroactive dates.
Let’s say your retroactive date on your current policy is 1-1-2010. You decide to replace that policy with another carrier that made coverage effective 1-1-2020. The new has a retroactive date of 1-1-2020, matching the policy effective date. This is the default retroactive dates for most policies, unless requested otherwise by you or your insurance agent.
Now a claim was reported on 6/1/2020 that occurred from work done on 5-10-2019. Since the original claims made E & O policy was cancelled on 1-1-2020, it will not provide coverage for a claim reported after 1/1/2020. To further complicate the issue, the new policy that was effective 1-1-2020 does not have the original retroactive date of 1/1/2010. it’s retroactive date is 1/1/2020.
The result of this mix up in dates is that you are without coverage for the claim reported on 6/1/2020 for work that was done on 5/10/2019.
This could be a huge and expensive problem for your business.
How can you have addressed this problem?
- Purchase an extended reporting period (tail coverage): If you had purchased a 12-month extended reporting period from carrier 1 this claim would have been covered by the original policy. The cost and availability of the extended reporting period depends by carrier and must be purchased usually within the first 30 days of the policy expiring.
- Adjust the retroactive date on the new policy to match the old policy retroactive date. If the new company allowed it, the retroactive date on the new policy should have matched that of the old policy. So if the 1/1/2010 retroactive date was placed on the new policy, then the new policy would have covered the claim in the above scenario.
With all the differences in the policy forms it is important to have an insurance agent to help walk you through them.
Call Huff Insurance at 410-647-1111 to discuss you contractors E & O insurance coverage needs.