Mistakes happen.

That’s why engineers need errors & omissions (E&O) insurance. Even if you’re not the one who made a mistake, you can still be dragged into a lawsuit.

A colleague of mine once told me about his friend, an electrical engineer. We’ll call him Bob. Bob produced cable tray layout plans for an offshore oil platform. A worker fell and was seriously injured while installing the cable tray. Bob was sued, along with the contractor tasked with performing the installation and numerous other parties.

It’s important to note that Bob was not onsite when the accident occurred. In fact, Bob was not responsible for any aspects of the work.  He didn’t plan the work. He didn’t control the work. He didn’t supervise the work. Bob’s scope of work was limited to producing a drawing showing the size and type of cable tray and where to install it. Nonetheless, Bob was sued.

The plaintiff’s attorney did eventually drop him from the lawsuit, presumably after learning that Bob didn’t have deep pockets. But, Bob incurred considerable expense defending himself before he was dismissed from the lawsuit. Bob would have benefited from having E&O insurance. Below are 5 ways engineers are protected by E&O insurance:

Liability From Mistakes In Your Work

The primary coverage provided under an E&O policy is liability arising from mistakes made in the professional services that you offer. This can be a small dispute with a contractor or a big mistake that results in millions of dollars of damages.

And as we’ve learned from Bob’s example, you can be sued even when an accident or injury wasn’t your fault.

Pollution-Related Claims

If your mistake results in a pollution incident, some E&O policies will cover it. But, it’s important to note that this coverage isn’t included in all E&O policies. If there is the potential risk of a pollution incident arising from an error in your work, then be sure that it is included in your policy.

Inspection Oversights

If your line of work includes inspections, then be sure to get an E&O policy that covers financial harm to your client in the event that there is an oversight in one of your inspections.

Rectification Expenses

Sometimes design defects are discovered mid-project after construction has started, but before the client has experienced any financial damage. Rectification coverage allows you to submit the design issue to the insurance company and a proposed fix, and the insurance company will reimburse you for fixing the design flaw.

Legal Defense Costs

Due to the complexity of engineering E&O claims, defending yourself from lawsuits and accusations often incurs significant legal costs. Not only do you have to hire an expensive law firm with engineering expertise, but you need to pay for expert witnesses and other engineering firms to research the incident as part of your defense.

Other Considerations

    • Are Defense Costs Included in the Limit of Insurance?

E&O policies can work differently than general liability policies. If you are insured for $1 million under most general liability policies, that’s $1 million available to pay out in claims. But, with most E&O policies, $1 million in insurance coverage does not equal $1 million available to pay out in claims. If defending you in court costs your insurance company $200K, then that amount is deducted from your policy limit, leaving only $800K available to pay out in claims. In other words, legal defense costs erode your policy limit on most E&O policies, meaning you need to account for those costs when choosing your limit of liability.

    • Can your Insurer Settle a Lawsuit Without Your Consent?

Let’s say you are accused of making a mistake that results in financial loss to your client. And the client is willing to accept a small settlement to resolve the issue. Would you do it? On one hand, it can make financial sense to avoid the legal fees; on the other hand, a settlement could be viewed as an admission of guilt and might affect your professional reputation in the community. Either way, the decision is yours to make. But, with E&O insurance, that decision about whether to settle might be taken out of your hands. Some insurance policies include a condition that your insurer can accept a settlement offer on your behalf, without your consent. That’s not a big deal with a general liability policy. But, with an E&O policy, it can be problematic if it negatively impacts your professional reputation.

  • Full Prior Acts Coverage

Suppose you purchase E&O insurance with coverage beginning on Jan 1. In March, you are sued for an alleged error that you made 3 years ago. Would your E&O insurance cover that prior mistake? The short answer is “No” – not unless you purchase full prior acts coverage. E&O insurance is a claims-made policy, which means there is a specific timeframe in which you can submit claims. The claim must occur and be reported to the insurance company in the policy period. The policy period is usually the date you first purchased E&O coverage from that particular insurance carrier.
By purchasing full prior acts coverage, you change the coverage start date of the policy to include any claims that occurred in the history of your practice. This provides you with protection against errors & omissions made years ago, but which have not yet been uncovered or resulted in a financial loss by your client.

  • How Much Does E&O Insurance Cost?

Costs vary widely. E&O coverage for engineers starts at around $1,000 per year, depending on the location. Some states cost more than others due to state-specific laws that impact construction projects and construction defects.
Of course, firms working on bigger projects and having a large book of business can expect to pay considerably more in premiums.