Contractor Professional Liability vs. General Liability Insurance

Understanding general vs. professional liability insurance

In the construction world, safeguarding your business goes beyond delivering quality work on time and within budget. It also means protecting your financial stability from unexpected claims that could derail a project or jeopardize your operations entirely.

Two key coverages every contractor should consider are general liability and professional liability insurance. While both are essential for managing risk, they address different exposures and serve distinct purposes. Let’s explore what these policies cover, how they differ, and why having both is vital for the comprehensive protection of your business.

What does general liability insurance cover?

General liability insurance is a foundational policy for contractors and project owners. It protects against claims of bodily injury and property damage arising from a contractor’s operations. For example, general liability insurance:

• Covers medical expenses and any resulting legal costs if a visitor trips and falls at a construction site
• Responds to the claim if a contractor accidentally damages a client’s property while performing work

However, general liability policies have significant limitations regarding professional services. Most policies explicitly exclude liability resulting from the rendering or failure to render professional services, such as engineering, architectural, or surveying work. This exclusion applies whether the services are performed by the contractors or subcontracted to a third party.

The gap in coverage: Why professional liability insurance is essential

Many contractors assume they don’t need professional liability insurance unless they’re directly involved in activities, like reviewing or stamping design or engineering plans. However, this assumption can leave them exposed.

As construction delivery models evolve, contractors increasingly use alternative methods, such as design-build, design-assist, and integrated project delivery. These models blur the lines between a contractor’s responsibilities and those of architects or engineers. This shift means that even if a contractor isn’t explicitly performing design work, they may still bear some responsibility for the overall project’s design integrity.

What does professional liability insurance cover?

Professional liability insurance protects contractors from claims arising from negligent acts, errors, or omissions in professional services. This policy covers third-party claims alleging that the contractor’s professional services caused a financial loss. For example:

• A contractor involved in a design-build project might face a claim alleging that a design error led to structural issues
• If a project specification error results in costly delays or rework, professional liability insurance can help cover the legal and financial consequences

While design-related claims are less common than general liability claims, they can be costly to evaluate, defend, and resolve. A contractor could bear these costs out of pocket without professional liability insurance.

Key coverage extensions for design-build contractors

Professional liability policies can be tailored with valuable coverage extensions that address unique risks design-build contractors face. Two of the most significant are Protective Indemnity Coverage and Rectification Coverage.

Protective indemnity coverage

This extension reimburses a design-build contractor for damages they are legally entitled to recover from a downstream design professional. If the design professional’s insurance program doesn’t fully cover the damages, protective indemnity coverage can help make up the difference. For example, if an architect’s error results in additional construction costs that exceed their insurance limits, this coverage helps ensure the contractor isn’t left footing the bill.

Rectification coverage

Rectification coverage provides first-party protection for expenses that a contractor reasonably incurs to mitigate or correct a design error before it leads to a claim. This proactive coverage can save contractors significant time and money by addressing issues early. For instance, it should cover the cost of correcting the error before it causes further damage or delays.

Why contractors need both general and professional liability insurance

Relying on just one type of insurance leaves contractors vulnerable to significant gaps in coverage. General liability and professional liability insurance complement each other, addressing different aspects of a contractor’s risk profile:

• General liability protects against claims of bodily injury or property damage from construction operations. For instance, if a client or visitor is injured while visiting a job site or a contractor accidentally damages a neighboring property during construction, this policy would cover the associated costs, including medical bills, repairs, and legal fees.
• Professional liability covers claims related to errors, omissions, or negligence in professional services. This includes situations where a contractor’s design specifications or professional advice leads to financial losses for a client. For example, if an error in a structural design results in additional construction costs or delays, the contractor could face significant liability. Professional liability insurance extends to services performed on behalf of the contractor by third parties.

By carrying both policies, contractors can ensure they’re better prepared for the wide range of risks they face, from on-site accidents to design-related disputes.

The cost of not having adequate coverage

It’s easy to overlook the importance of professional liability insurance, especially for contractors who don’t view themselves as “design professionals.” However, as construction delivery methods evolve and the industry becomes more collaborative, the potential for design-related claims increases. Even if such claims are rare, their financial impact can be devastating. Legal fees, expert witness costs, and settlements can quickly add up, jeopardizing a contractor’s economic stability.

Moreover, many clients can now require contractors to carry both general and professional liability insurance as part of their contractual obligations. Failing to meet these requirements could result in lost business opportunities.

Choosing the right coverage for your business

Selecting the right insurance policies requires a clear understanding of your business’s unique risks and exposures. Here are a few tips to help contractors make informed decisions:

• Work with an experienced broker: An insurance broker specializing in construction can help you identify your needs and recommend appropriate coverage
• Review contracts carefully: Ensure that your insurance policies align with the requirements outlined in client contracts
• Assess your delivery models: If you’re involved in design-build or other collaborative models, prioritize professional liability coverage
• Consider coverage extensions: Protective indemnity and rectification coverage can provide critical additional protection for design-build contractors

Take action to protect your assets

Managing risk is as important as managing schedules and budgets in the construction industry. General and professional liability insurance helps protect your business from unforeseen claims and financial losses. By understanding the differences between these policies and investing in comprehensive coverage, contractors can safeguard their operations, protect their balance sheets, and focus on delivering successful projects. Regarding insurance, proactive planning is always the best foundation for a strong and secure business.