Do Contractors Need Professional Liability Insurance?

If you design, lay out, specify, manage or advise on any part of a project, you likely need contractors professional liability. General liability pays for bodily injury or property damage caused by an accident (IRMI, occurrence), and economic damages from professional services are not a covered loss under it (IRMI). A redesign, a delay or a cost overrun caused by your design or advice is exactly that kind of loss.

This is one of the most common misunderstandings we see. Contractors who only build to someone else's stamped plans have less of this exposure, but design-build work, construction management, delegated design and system layout all move design risk onto the contractor. Sizemore Insurance writes contractors general liability, workers compensation and professional liability together, so we can line the three up and show you where the gaps are. We compare more than 100 insurance companies, and forms vary a great deal by insurance company.

What contractors professional liability covers

Errors and omissions in your professional services. Covers claims that your design, layout, specifications, value engineering or advice was negligent and cost the owner money, including redesign, delay and cost overrun claims that general liability does not pay (IRMI). Which services count as covered depends on the policy, and forms vary by insurance company.

Design work you hire out. Covers your liability for the engineers, architects and design subconsultants you hire. A design-builder owes the owner the design even when it cannot collect from the designer, so relying only on the designer's policy leaves a gap (IRMI).

Defense costs. Pays attorneys and experts to defend you against a professional liability claim, even a weak one. Check whether defense costs reduce the limit.

Rectification or mitigation. Some policies pay your own cost to correct a design error found during construction, before it turns into a claim. IRMI describes this as first-party coverage, sometimes called mitigation of damages (IRMI, IRMI on rectification and mitigation).

Contractor's protective indemnity. Some policies pay your damages from errors by design professionals you hired, above what their own professional liability limits pay (IRMI).

Construction management and owner's advisor services. Covers claims over services like preconstruction, scheduling, cost control, value engineering and construction administration, which North Carolina law lists as construction management services (G.S. 143-128.1).

Annual or project-specific policies. Coverage can be written annually for all of your operations or for a single project (IRMI). A project-specific policy keeps its limit dedicated to that one job, including the extended reporting period after construction (IRMI).

Claims-made trigger, retroactive date and tail. Professional liability is written on a claims-made basis (IRMI). The retroactive date cuts off claims from work before a set date (IRMI), and an extended reporting period, or tail, lets you report claims after the policy ends (IRMI).

What it usually does not cover

• Bodily injury and property damage from your construction operations, which belong on general liability
• The cost to redo your own faulty workmanship, which IRMI describes as a business risk contractors must retain
• Pollution and contamination claims, which usually need contractors pollution liability
• Warranties, guarantees and contract promises that go beyond the normal professional standard of care
• Work performed before the retroactive date, or problems you knew about before the policy started
• Services the policy does not list, so tell the insurance company everything you actually do

Forms, endorsements and availability vary by insurance company. Your own policy governs.

Which contractors need professional liability

• Design-build general contractors and builders who prepare their own plans
• Construction managers, whether at risk or acting as the owner's advisor
• Contractors who hire engineers, architects or other design subconsultants
• HVAC, mechanical, plumbing and electrical contractors who design, size or lay out systems
• Fire sprinkler and fire alarm contractors who prepare layout and design drawings
• Solar installers, roofing and building envelope consultants, and energy auditors who give design or performance advice
• Home inspectors, who must carry insurance to be licensed in North Carolina

North Carolina rules for contractors who design

Design-build is allowed, but each piece must be licensed. North Carolina lets licensed general contractors, engineers and architects join in a design-build undertaking, but only licensed people may perform each service, and the owner must get written disclosure of each party's duties (G.S. 83A-13). For public projects, a design-builder provides design and general contracting under a single contract, with engineering and architecture done by licensed engineers and architects (G.S. 143-128.1B).

Builders can draw plans for some buildings. No architect's license is required to prepare plans for a family residence up to eight attached units, for smaller institutional or commercial buildings within the statutory value and size limits, or for shop and erection drawings (G.S. 83A-13). That is legal, and it also means the builder owns the design risk.

Fire sprinkler contractors design their own systems. The engineering law does not prevent a licensed fire sprinkler contractor from preparing fire sprinkler planning and design drawings (G.S. 89C-25), and fire sprinkler contracting includes laying out systems (G.S. 87-21). Engineering is otherwise regulated by the NC Board of Examiners for Engineers and Surveyors, and architecture by the NC Board of Architecture.

Construction management at risk. On public projects, a construction manager at risk must be a licensed general contractor and guarantees the cost of the project, while the public owner contracts directly with the architect or engineer (G.S. 143-128.1). The same statute defines construction management services to include value engineering and preconstruction services, which are advice exposures.

No license requirement, but contracts require it. A general contractor license is needed for projects of $40,000 or more (G.S. 87-1, NC Licensing Board for General Contractors). We found no professional liability requirement in the general contractor licensing law (Chapter 87, Article 1), but owners write it into contracts. For example, the Town of Leland's design-build request for qualifications asked teams to certify professional liability for all designers of record of not less than $1 million per claim (Town of Leland).

Home inspectors. A licensed North Carolina home inspector must carry $250,000 of general liability plus either $250,000 of errors and omissions insurance, a bond, or minimum net assets set by the Board (G.S. 143-151.51).

What drives the cost of contractors professional liability

Contractors professional liability is underwritten job type by job type. These are the factors insurance companies weigh:

• How much design, layout or advice you do compared to pure construction
• Project types and sizes, and whether you work as design-builder or construction manager
• Whether you hire designers, and the professional liability limits they carry
• Contract terms, including indemnity language and owner insurance requirements
• Claims history and how long you have had continuous coverage (your retro date)
• Limits, deductible or self-insured retention, and whether defense is inside the limit
• Annual coverage for all work versus a project-specific policy
• Optional rectification or protective indemnity coverage

We do not publish average prices. A licensed advisor quotes your actual situation across more than 100 insurance companies.