General liability vs. professional liability — illustrations of professional and general liability insurance forms with 2 corresponding photos of hands filling forms out

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When it comes to protecting your contracting business from claims and lawsuits, it can be tough to know what type of insurance you should purchase. Small companies can’t afford to pay for coverage they don’t need, so it’s important to know which policies you do need.

Liability insurance protects your business against claims for damages caused by you and your workers, if you have any. Claims and lawsuits can be expensive and can potentially bankrupt your company. Insurance covers these costs, allowing you to continue providing services even after a claim.

The two most common liability insurance policies for contractors are general liability and professional liability. Let’s look at these two coverages in detail, so you know whether you need one or both.

What are general liability and professional liability insurance?

General liability and professional liability protect businesses from different risks.

General liability insurance

General liability insurance protects businesses from claims of property damage or injury caused by their workers or incurred on their property. It can pay for medical costs and legal fees. This coverage protects businesses from third-party lawsuits and pays legal fees for the defense of allegations of slander or libel.

In most states, contractors need to be licensed to provide construction services. In many of these states they are required to purchase general liability insurance. However, even if it’s not required, purchasing general liability insurance is a good investment for any business. Without this coverage claims and lawsuits can cost thousands of dollars and may bankrupt small businesses.

How much general liability insurance costs is dependent on several business factors, including the type of business, how many years of experience you have, and the business’s location. Contractors work in a risky industry, so their premiums are often higher than other companies. Premiums vary by insurer, and many insurance companies provide premium quotes online, so you can shop around. Or contact a local insurance agent who can do the shopping for you.

Professional liability insurance

Professional liability insurance, also called errors and omissions, or E&O, covers professionals when the services they provide lead to financial losses for a third party. It protects these companies from damages for mistakes in their professional services. For example, if an engineer makes a mistake in designing a wall, and the wall collapses, this coverage will help pay for the legal defense of the claim.

In construction, most contractors are not required to carry professional liability insurance because they are basing their work on designs by other parties who take professional responsibility for them. However, if a contractor has an internal design division, the company should have professional liability coverage. This coverage may also be required in certain contracts, either by request of the owner or lender.

A contractor can expect a professional liability policy premium to cost approximately 1% of annual revenue, though the cost of professional liability insurance is dependent on several factors. These include the amount of coverage required, the type of business, years in business, location, and claims history. 

The actual cost can vary widely depending on a variety of factors, including geographical region, trade or specialty, and claim history. When an underwriter is looking at coverage limits and costs, a contracting company’s financials typically dictate the policy cost.

The cost of a professional liability policy is typically based on revenue, though employee headcount may come into consideration in some cases. A policy underwriter will generally look at a contractor’s past and expected revenue, as well as the types of contracts a business usually signs.

What’s the difference between general liability and professional liability insurance?

The difference between general liability and professional liability insurance is found in the risks that they cover. General liability protects contractors from third-party claims of damages or injuries as a result of their business activities, while professional liability protects contractors and designers from liability claims due to mistakes in their design.

Together, the policies protect contractors and designers from liability for their business operations and their professional design services. Since lawsuits can often bankrupt small companies, it pays for contractors to purchase either or both of these policies.

Do you need both types of coverage?

It’s a good business practice for all contractors to purchase general liability insurance to protect your company and its assets. In most states, this coverage is required to be licensed and perform construction work.

Professional liability insurance or E&O should be purchased by contractors providing in-house design services or architectural and engineering firms. It protects these businesses from claims related to their design and other professional services.

So, if your contracting company doesn’t provide design services, general liability insurance should be sufficient to cover your business. Note that you may be required to purchase additional coverage, like workers compensation insurance, if you have employees. You may also want to invest in other coverages to protect your equipment, tools, and company vehicles.

If your business provides contracting and design services, you should purchase both general liability and professional liability insurance to fully cover your business. In addition, you may be required to purchase additional coverage. You may also want to include coverage for your equipment, tools, and vehicles.

Although it may seem like insurance is just another expense that you have to pay, it offers protection against damages and legal fees that could potentially force you to close your business. It’s an investment in the company that pays for itself with your first claim.

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