Contractor Indemnity Insurance: Everything You Should Know
Contractor indemnity insurance (often called contractors professional indemnity insurance) is a professional liability policy. It’s often purchased by general contractors, design-build contractors, and construction managers purchase to cover their professional liability for design services or subcontracted design services on a construction project.
If you are a trade/specialty contractor and don't perform significant design work, you might be looking for information about contractors errors and omissions insurance. To learn about this similar policy, visit our article, "Understanding Contractors Errors & Omissions (E&O)
Do you need indemnity insurance?
The typical contractor purchasing contractor indemnity insurance either has design professionals on staff or subcontracts design services out to other firms.
In our experience, contractors with these characteristics are typically:
- General contractors
- Design-build contractors
- Construction managers
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What does contractors professional indemnity insurance cover?
Technically speaking, the policy covers scenarios falling under this definition:
"... an error, omission, or other act that causes liability in the performance of professional services for others by you or by any person or entity, including joint ventures, for whom you are liable."
But what does that mean?
While these policies vary, most are comprehensive in coverage. Professional indemnity insurance can cover a nearly infinite number of scenarios you can face as a construction company owner.
That being said, certain claims scenarios are more common than others. There are also common concerns that we hear from contractors that pertaining to this policy.
Here are the four biggest scenarios where contractor professional indemnity insurance is most useful:
If you have a specific scenario you are concerned about, or want to review with an expert, let us know so that we can look at your specific situation in context.
1. Your Design Flaws
A primary reason for contractors involved in the design of a project to purchase contractor indemnity insurance is to have coverage against flaws in their design work.
The smallest mistake can lead to big costs, whether the project is an addition to an existing building or new construction. We don’t just mean the cost of fixing the error, either; you’ll also need coverage for the associated project delays and your client’s lost income. Contractor indemnity insurance can help you cover these risks.
Here is an example of a claim resulting from a contractor design flaw:
A general contractor was retained by a biopharmaceutical firm to design and build a "state of the art" process facility. Cracks appeared in the ground floor slab approximately one year post-completion. After extensive forensic research it was determined that the slab was under-designed and was unable to support the manufacturing equipment. The cost for slab replacement exceeded $600,000.
2. Subcontracted Design Flaws
Similar to contractors that perform in-house design work, if you are in charge of the project and you subcontract out design work, you need a professional indemnity insurance policy to cover problems associated with the subcontracted firm’s work.
3. ADA And FHA Administrative Actions
As a builder, your design and construction project must comply with the regulations laid out in the Americans with Disabilities Act of 1990, as well as Federal Housing Administration regulations.
If your construction project is not compliant with these regulations, significant fines could be imposed that could derail your project. A contractor indemnity insurance policy would cover these fines up to the limit shown on your policy.
4. Legal And Defense Costs
Even if a lawsuit brought against you has no merit, defending yourself in court demands significant time, resources, and money.
Many contractors purchase indemnity insurance to coordinate these resources and pay for the legal costs associated with a faulty design lawsuit.
Having an insurance policy that covers this means you have a specialty team behind you. They’ve dealt with hundreds of similar claims and know exactly how to guide you through the process and minimize damage to your company.
Coverages We Recommend
Although this coverage isn't included on every contractor indemnity insurance policy, it can be found on many of the policies out there.
Rectification coverage allows policyholders to make a claim against their own policy for reasonable and necessary fees, costs, and expenses to correct a defect.
Joint Ventures Coverage
If you’re partnering with a design firm on a joint venture, you likely aren’t going to find coverage for it on many contractor indemnity insurance policies. You will need to seek out an insurance carrier that specifically offers this coverage (such as Chubb or Victor).
Without having this coverage, the policy would cover the liability resulting from a joint venture project with a design firm.
Pollution Liability Coverage
Contractor indemnity insurance often includes coverage for the cleanup costs, penalties, and legal cost associated with a pollution accident.
When getting a professional indemnity quote, we suggest looking into the cost of adding on pollution insurance. You can add this coverage for as little as $1,000 per year, depending on the work you are performing.
This will extend your professional liability coverage to include the cleanup costs, legal expenses, and regulatory fines associated with a pollution incident.
For more information on pollution liability insurance, check out our article, "Contractors Pollution Liability (CPL) - What To Know."
Contractor Indemnity Insurance Cost
The cost of contractor indemnity insurance ultimately depends on the projects you are working on, the scope of your operations, your experience in the field, and your previous loss history.
Pricing usually starts at $3,000-$6,000 annually and increases from there once your business is a certain size. If you are a small contractor, you can expect to pay close to that amount.
If you are a larger contractor working on complex projects, finding out a price can be a little more complicated. If you want to insure your business with this policy but are unsure about what it would cost, let us know. We can help you put together a couple of options to give you a good idea of what you should be paying.
Contractors indemnity insurance is essential for contractors who are involved in any of the design work during a building project.
This coverage ensures that a small error in the project design won’t mean the project will become wildly unprofitable or bankrupt the company. In short, it can give you peace of mind.
The insurance company will also put an experienced team behind you to help coordinate the claim and get you through the situation with minimal damages.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.
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