While E&O doesn’t address every
concern for a contractor, it
does speak to many common ones
At some point, an honest mistake could prove to be too large for an out-of-pocket fix.
By Marc McNulty, CIC, CRM
Like many others in the independent insurance agency arena, I receive all different sorts of emails from our carrier partners. Some contain product enhancement updates while others reveal underwriting changes. A few contain information for those who may be newer to the industry—which is the target audience of this column—and most of the time I find those to be informative and helpful.
However, on occasion I find that the advice offered by these emails may be incomplete, and usually it is due to the coverage offerings (or lack thereof) from that carrier. This is where it pays to do your homework and not rely on a single source of guidance.
For example, I recently received an email from an insurance company that offered suggestions regarding what type of insurance is needed for flooring contractors. The article then listed the following lines of coverage and gave a quick blurb about how each can apply to a flooring contractor’s business operations:
- General Liability
- Workers Compensation
- Commercial Auto
- Commercial Property
- Equipment Breakdown
- Inland Marine
- Commercial Umbrella
- Cyber
At first glance, a new producer may think this is a comprehensive list. While the article was undoubtedly informative and gave great examples of how each coverage applies, I couldn’t help but notice that a key coverage was missing: contractors errors and omissions (E&O) insurance.
Before we dive into some of the specifics, let’s take a step back and examine a couple of key provisions in the CG 00 01 04 13 Commercial General Liability Coverage Form.
For example, suppose a flooring contractor recommended an incorrect type of flooring needed for its customer’s needs, installed this flooring, and it prematurely wore out, causing the client to cease use of the affected area. Would general liability cover this?
Most likely not.
While this situation could initially fall under the definition of “property damage” within the form, which includes “Loss of use of tangible property that is not physically injured,” exclusion m. (1) in the Coverage A exclusions reads as follows:
“Property damage” to “impaired property” or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy or dangerous condition in “your product” or “your work.”
Furthermore, the “your work” definition is quite important:
“Your work”:
- Means:
(1) Work or operations performed by you or on your behalf; and
(2) Materials, parts or equipment furnished in connection with such work or operations.
- Includes:
(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your work”; and
(2) The providing of or failure to provide warnings or instructions.
See where we might have an issue? This is where E&O insurance comes into play.
Once your wheels start turning, can’t you envision additional potential issues, such as warping/buckling of flooring, issues arising from improper sub-flooring height, or issues arising from the ignoring of manufacturer directions/instructions?
I’m sure you can imagine other scenarios with different types of contractors.
In short, contractor’s E&O coverage will address many such claims alleging faulty workmanship or installation, defective materials, and/or improper design. And while it won’t address every potential scenario a contractor can encounter, it addresses many common concerns.
However, like anything else, you’ll need to carefully read the policy forms so that you are familiar with the form’s exclusions. For example, the form may contain an exclusion for subcontracted work, which could prove to be huge depending on how the contractor performs installation.
Other common exclusions include:
- Pollution—liability from the actual or alleged seepage, discharge, release of, or escape of pollutants (but remember pollution liability coverage is available!)
- Fungi or Bacteria—including actual or alleged inhalation, ingestion, contact with, absorption of, exposure to, etc.
- Profit—liability arising from expected profit or loss of profit
- Substitutions—liability arising from the contractor swapping out materials or products without prior authorization from their customer
On the flipside, check with your carriers to see what—if any—enhancements are available. For instance, prior acts coverage might be an option.
While the various lines of coverage mentioned in the carrier’s email are undoubtedly important, don’t skip over this similarly significant coverage, even if your client or prospect tells you that they self-insure their own mistakes by correcting them. At some point, an honest mistake could prove to be too large for an out-of-pocket fix.
The author
Marc McNulty, CIC, CRM, is a principal at The Uhl Agency in Dayton, Ohio, and has been with the agency since 2001. He divides his time among sales, marketing, technology and operational duties. You can reach Marc at marcmcnulty@uhlagency.com.
