A recent article in Risk & Insurance Magazine highlighted various insurance carriers' approach to recouping losses from catastrophe, and that made me think about errors & ommissions coverage for general contractors.
Most carriers are alike in one respect: in a catastrophe, their concern is with the insured. The goal is for their adjusters to process a claim and compensate the insured as quickly and accurately as possible.
When faced with a 25 billion-dollar loss like Superstorm Sandy, though, carriers may look to regain as much of that money as possible, and one avenue is subrogation. Subrogation is when the carrier pays the claim to the insured and then seeks restitution from another source. Let's be clear about the fact that this isn't some sort of vengeful litigation, but rather a way for a company to stem some losses when the liability may not be wholly theirs to bear.
Here's an example: a homeowners company pays for roof damage for many homes after a tornado, but the adjuster notices that some homes suffered far more severe damage than others, even when subjected to exactly the same winds. Further investigation reveals that the severely damaged roofs were all constructed by the same company, and that company did no work on the relatively stable roofs. The carrier may collect evidence and bring suit against that roofing company, alleging that their work resulted in greater storm damage and therefore greater loss to the carrier.
If you are the general contractor who hired that company, you may find a lawsuit coming your way, too. So what happens if you're met with a suit years after you've finished a house that's been ravaged by an F5 tornado? As with any lawsuit, whether or not you're liable you still need a defense and that can reach in to the tens of thousands very quickly.
This kind of coverage is called errors & omissions, in this case Contractors Professional Liablity. It can protect you in the event of "faulty workmanship of subcontractors when there is a construction management contract" even years after the project is finished. Ask your insurance professional more about it, or contact us.