Professional Liability Insurance
How Professional Liability Claims Work for Contractors
How Professional Liability Claims Work for Contractors — what contractors need to know to protect against professional liability claims.
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What to Expect From First Notice to Settlement
Professional liability insurance (also called Errors & Omissions or E&O) protects contractors when a client claims your professional advice, design input, or project management decisions caused them financial harm. It covers legal defense costs and settlements — gaps that general liability leaves wide open.
How Claims Arise
Professional liability claims typically begin with a demand letter or formal complaint — rarely a surprise lawsuit out of nowhere. Common triggers: a project completion dispute, an owner’s allegation that your design or advice caused a cost overrun, or a change order dispute that escalates into a professional services allegation.
Reporting Requirements
Claims-made policies require prompt reporting. Notify your insurer as soon as you receive any written demand, complaint, or notice of potential claim — even if no lawsuit has been filed. Failing to report promptly can jeopardize coverage. When in doubt, report.
The Defense Process
Your insurer assigns a defense attorney from their approved panel. You don’t hire your own attorney for a covered claim — the insurer manages defense. Costs: attorney fees, expert witnesses (critical in construction disputes), deposition costs, and court fees all count against your per-occurrence limit.
Defense Costs Inside vs. Outside the Limit
Most professional liability policies have defense costs inside the limit — meaning legal fees reduce the amount available for settlement. A $1M policy with $300,000 in defense costs leaves only $700,000 for settlement. Some carriers offer defense outside the limit (costs don’t erode your limit) — worth asking about.
Settlement vs. Trial
Most professional liability claims settle before trial. Your insurer has authority to settle within policy limits without your consent in most cases. If you have reputational concerns about admitting liability, discuss this with your attorney — some policies include consent-to-settle provisions that give you more control.