The construction industry is among the most lucrative because there’s always a need for new residential, commercial, and industrial buildings. Growth rates have accelerated in recent years, with the U.S. construction industry growing 3.4% year on year in 2022.

Yet the costs involved mean that litigation can be expensive. As a result, even minor mistakes can cost millions of dollars, delay projects substantially, and cripple the reputations of the construction firm involved.

And this is where Errors & Omissions coverage comes in. Let’s examine what it is, its importance, and how not having it can impact construction companies.

What is Errors and Omissions (E&O) Insurance?

E&O is a critical piece of coverage within the construction business. Everyone from large construction firms to independent contractors requires it. The easiest way to view E&O coverage is as a form of professional liability insurance.

Accidents happen, but regardless of the intention, you can still find yourself in a courtroom. According to the U.S. Small Business Administration (SBA), up to half of all small businesses expect to be sued yearly.

With so much on the line in the construction industry, any lawsuit could cost you a six or seven-figure sum. E&O coverage is designed to protect you against claims made against the quality of your professional services.

Your policy can help cover everything from attorney fees to settlement costs. In other words, this is essential for any construction company, and you’ll often be asked to show proof of insurance during the bidding process.

Why Do You Need E&O in the Construction Industry?

Everyone working in this business faces massive risks and liabilities. For example, a problem with the foundations, the electrical systems, or the design could lead to you facing litigation. In addition, your customer's expectations are higher than ever before, so you need to defend yourself against that.

Even the simplest complaints can quickly escalate if mishandled. With razor-thin margins in the industry, it’s easy to find yourself in a financial blackhole and lose everything you’ve worked for.

You may be wondering, “Isn’t this what general liability insurance is for?”

To an extent, general liability coverage is limited in what it will protect you from. An E&O policy is the only way to ensure you have ironclad coverage, whatever happens.

How Does E&O Protect Construction Firms?

E&O coverage protects you against a variety of accidents and mishaps that could occur after finishing the job. At its heart, E&O protects you against any disagreements or disputes arising from an error, omission, or negligence.

Most people believe that E&O insurance in construction only defends you if you’re actually held liable, but this isn’t true. Even legal cases where you win can still leave you scrambling for cash flow.

This type of insurance will cover the costs of any repair work you need to carry out and any legal fees you’re liable for. First, however, you need to make sure your contractors can differentiate between E&O and liability insurance.

Liability insurance typically focuses on advisory services and design work rather than the actual execution of the project itself.

E&O plans can be customized according to the needs of your organization. You may even find some insurers that bundle liability and E&O insurance policies together, so you only need to make a single payment every month.

Will E&O Insurance Cover You Against Everything?

Unlike your auto insurance policy, the extent of E&O coverage differs depending on the insurer. Many construction companies have found themselves facing financial ruin because they didn’t inspect their policies closely enough.

Some insurers will offer a broad range of coverage, whereas others may offer only rigid coverage with higher premiums attached.

Insurers are becoming more common to offer tailored plans for construction companies, so you only pay for what you need. Unfortunately, due to this stance, liability and E&O policies rarely overlap, meaning you’ll need both to be fully protected.

Here are some of the things your E&O policy typically won’t cover:

• Intentional damages
• Property damage
• Physical injury
• Work in progress
• Subcontractor-led work

At its core, E&O offers a deeper level of coverage than liability insurance. As a result, it fills the coverage gap that every working professional and construction company has.

Not having the appropriate coverage level makes you vulnerable to litigation, regardless of how frivolous.

Does E&O Offer a Return on My Investment?

Errors and omissions apply to a variety of industries, but in the construction business, the high expenditure on projects can mean even a minor mistake can lead to a massive legal case.

E&O doesn’t have to be as expensive to purchase as you might think. Even while paying the premiums, a single instance of litigation can give you a massive investment return.

Without insurance, everything not covered by a general liability policy will have to be paid out of your company’s coffers.

The impacts of a single E&O-related case can lay even the largest construction firm low, so this is a non-negotiable protection option.

Conclusion

A simple error or omission can be catastrophic for anyone in the industry. E&O deepens your level of coverage, but you need to ensure you’re working with an insurer who will stand by your side.

Don’t opt for the cheapest coverage option available because it will typically come up short when you need it most. Instead, take the time to do your research and speak to insurers directly. Design a policy based around the activities of your business so you’re not paying for more than you need.

Have you taken out E&O insurance yet?