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The Importance of Requesting Proof of E&O Insurance

The Importance of Requesting Proof of E&O Insurance

Tuesday, April 26, 2016/Categories: errors-and-omissions-insurance

Sometimes your IT business needs to hire subcontractors, especially when you take on work outside your core specialty. But if something goes wrong with the subcontractor's work, your business may take the blame.

That's why it’s so important to make sure your subcontractors have their own Errors and Omissions Insurance. By requiring this coverage, you…

  1. Verify that your subcontractors are financially stable and have taken steps to limit their liability.
  2. Ensure that your insurance, claims history, and reputation won't take a hit if a subcontractor does something wrong.

Why Subcontractor E&O Insurance Is Important

Daniel Lieberman, Employment Law Attorney at (@DLOLancaster), has nearly 20 years of experience and knows how crucial it is for business owners to manage their liability. He's seen it all, so believe him when he says, “It is vital that subcontractors carry their own Professional Liability Insurance.”

Example: Say an independent web developer you hired accidentally uses copyrighted images for the project. Your client could sue you for that mistake. You were the one who decided to use a subcontractor, after all.

If your subcontractor has their own insurance, your insurance company may be able to subrogate their insurer to recover the losses they paid to your client, which can help prevent the claim from negatively impacting you. It’s really about protecting your own business.

Lieberman also points out that employers and subcontractors are often in a gray area when it comes to legal liability. It can be tough to pinpoint who is liable, which is another reason to ensure your subcontractors have liability coverage.

It may seem like a no-brainer to check for coverage, but many IT businesses don't. We found that just over half (57 percent) of the tech professionals who apply for insurance from TechInsurance require evidence of E&O Insurance from all subcontractors.

In other words, a lot of businesses run the very real risk of paying for their subcontractor's mistakes.

How Can Subcontractors Prove They Have Insurance?

To confirm that your subcontractors actually have Errors and Omissions Insurance (and that it's the right amount of coverage to protect you), check their Certificate of Liability Insurance [PDF].

This certificate summarizes the coverage a policy offers, including its…

  • Expiration date.
  • Coverage limits.
  • Exclusions.

Ask for it before you hire a subcontractor. In interviews or negotiations, make sure they know they’ll need to show an actual insurance certificate. One you have a physical or digital version, call the listed insurer to verify that the policy is active and paid for.

How to Request Proof of E&O Insurance in Your Contract

Attorney Matt Meyers of (@BeckerPoliakoff) knows better than most how to make sure your insurance needs are met. Voted one of the top lawyers in New Jersey in 2012, 2013, and 2014, he jokes that he’s one of the “nasty plaintiff lawyers,” meaning he’s the guy who sues you when somebody messes up a contract.

Meyers recommends that your subcontractor contract include the following five requirements:

  1. Subcontractors have to show you their proof of insurance.
  2. The Certificate of Liability Insurance shows that the policy is paid for and the coverage will be in effect while the contractor is working for you.
  3. The policy needs to have adequate coverage (for IT, that’s typically around $1 million).
  4. Your business is named as an additional insured on the policy.
  5. Subcontractors agree to defend and indemnify your business, holding you harmless.

How Much Technology E&O Insurance Should Contractors Have?

The most common E&O policies sold at TechInsurance offer $1 million or $2 million in liability protection. More than 75 percent of our customers choose coverage in that range.

However, your clients may ask for more coverage if you’re working on a major project. So before you tell your subcontractors how much coverage they need, double check your own client contract to find the requirements.

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