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What to Do If a Contract Forces You Into an Uninsurable Risk With Professional Liability Insurance (Errors & Omissions)

When a client contract requires you to assume liability that your professional liability (Errors & Omissions, E&O) insurer will not cover, you face immediate financial and legal exposure. This article walks through practical, contract-focused and insurance-aware steps for U.S.-based firms — from solo consultants in New York City to architecture firms in Los Angeles — so you can protect your business, preserve E&O coverage, and negotiate enforceable contract language.

Why this is urgent (and common)

  • E&O policies exclude certain risks (intentional acts, punitive damages, contractual liabilities beyond insured negligence).
  • Many contracts demand indemnity for unknown risks, hold-harmless for third-party claims, or unlimited liability — clauses insurers commonly deem uninsurable.
  • Signing a contract that obligates you to cover uninsured exposures can lead to denied claims, uninsured loss, or breach of your E&O policy terms.

For context on market pricing and insurer stance, note typical U.S. E&O premium ranges and carriers:

  • Hiscox: small-business E&O policies often start from roughly $350–$1,000/year for low-risk consultants. (See Hiscox small business E&O offerings.)
  • The Hartford: typical small professional liability policies commonly run $500–$2,000/year depending on industry and limits. (See The Hartford professional liability overview.)
  • Aggregated marketplace data (Insureon) shows wide variation by profession: solo consultants often pay $500–$1,500/year, while technology firms or architects often pay $1,200–$10,000+ annually. (See Insureon cost guides.)

Sources: Hiscox, The Hartford, Insureon.

Immediate steps if you identify an uninsurable contractual clause

  1. Stop — don’t sign yet. Give yourself leverage to negotiate before the contract is executed.
  2. Notify your E&O carrier or broker immediately. Ask for written confirmation whether the specific clause is covered, excluded, or would trigger a policy change.
  3. Get counsel from an insurance-savvy attorney. Especially in New York, California, Illinois, and Texas where litigation and contract nuances are common.
  4. Document insurer response. If the insurer refuses coverage for the clause, obtain a written declination; this helps in negotiations and if a client later sues.
  5. Negotiate contract language (see sample edits below) or request alternative protections such as caps, carve-outs, or mutual indemnities.

Practical negotiation tactics to avoid uninsurable risk

  • Carve out “insured negligence” language: Limit the indemnity to acts “to the extent caused by Consultant’s negligence, errors, or omissions and covered by Consultant’s E&O policy.”
  • Add a monetary cap: Propose a fixed cap (e.g., contract value or a multiple, such as 1–2× contract fees) for liability exposure.
  • Exclude punitive and exemplary damages: Explicitly state the indemnity does not apply to punitive damages or intentional misconduct.
  • Mutual indemnity: Push for mutual responsibility for each party’s negligence.
  • Obtain client reimbursement or defense-with-reserve: Ask that your client provide prompt defense under a reservation of rights or reimburse insured losses that fall outside coverage.
  • Request insurer approval clause: “This indemnity is subject to the Consultant’s ability to obtain coverage from its professional liability insurer.”

See detailed drafting tactics in: Drafting Contracts to Protect E&O Coverage: Clauses Every Firm Needs.

Options when negotiation fails

If the counterparty refuses to modify an uninsurable clause:

  • Walk away: It’s often the safest commercial choice for small firms or sole practitioners.
  • Shift risk via third-party guarantor: Ask for a parent company or insurer of the client to guarantee obligations.
  • Buy supplementary cover or a surety bond: Some gaps can be closed with specialized riders, excess policies, or a performance bond — but carriers rarely underwrite intentional or punitive exposures.
  • Accept with pricing and reserve protections: If you must accept the clause to win the work, charge higher fees to build a contingency reserve and require indemnity from subcontractors.

For guidance on specifically identifying risky clauses, see: Uninsurable Contractual Obligations: Identifying and Avoiding Risky Clauses.

How insurers typically respond to uninsurable contractual obligations

  • Decline to defend or indemnify for claims arising from contractual liability beyond the policy’s coverage.
  • Issue endorsements or exclusions removing the disputed risk from coverage going forward.
  • Increase premiums or refuse renewal if you accept substantial uninsurable obligations.
  • Require evidence (e.g., a signed contract showing insurer notification) before deciding coverage.

Because carrier responses vary by insurer and state, confirm specifics with your broker and insurer. See market references: Hiscox, The Hartford, Insureon.

Sample contract language to protect your E&O coverage

  • Problem clause (common): “Consultant shall indemnify Client against all losses, claims, liabilities, costs and expenses (including attorneys’ fees) arising out of Consultant’s services.”
  • Safer alternative: “Consultant shall indemnify Client to the extent such loss, claim or expense results from Consultant’s negligent acts, errors or omissions in the performance of professional services and only to the extent such liability is covered under Consultant’s professional liability insurance.”

Suggested edits and more model language are available in our resource: Sample Contract Language to Align Indemnities with Professional Liability Insurance (Errors & Omissions).

State and location-specific considerations

  • New York City and Washington, D.C.: High litigation environment; carriers scrutinize broad indemnities and unlimited liability.
  • California (Los Angeles, San Francisco): Large professional services and tech contracts; watch for strict subcontractor flow-downs in construction and design contracts.
  • Chicago and Houston: Midwestern and energy-sector contracts may include strict indemnities; negotiate caps and carve-outs aggressively.

Local counsel can advise on enforceability and customary allocations in your jurisdiction.

Cost considerations — how much to charge if you must accept risk

If you accept a contract with added uninsured exposure, price the deal to cover:

  • Expected incremental insurance expense (insurer premium increase or purchase of excess/specialty cover).
  • A litigation reserve (commonly 10–30% of contract value for higher-risk services).
  • Administrative/legal negotiation costs.

Example pricing benchmarks in U.S. markets:

  • Solo consultant in NYC: base E&O premium ~$500–$1,500/yr; add contingency fees of 10–30% of projected fees when taking higher contractual risk. (Insureon; Hiscox)
  • Small tech firm in San Francisco: E&O base $1,200–$5,000+/yr; consider adding a 20–50% risk load for uninsurable contractual exposure. (Insureon; The Hartford)

Sources: Insureon — Professional liability cost benchmarks; Hiscox — small business E&O information; The Hartford — professional liability overview.

Checklist before you sign

  • Has your broker/insurer reviewed the clause and provided written guidance?
  • Is the indemnity limited to negligence and covered risks?
  • Is there a monetary cap and exclusion for punitive damages?
  • Can you require subcontractors to assume downstream obligations and carry E&O?
  • Have you priced the contract to reflect added uninsured exposure?

See our contract-review checklist for more: Checklist for Reviewing Contracts That Could Impact Professional Liability Insurance (Errors & Omissions) Claims.

Final notes

Contracts that force you into uninsurable risk create a mismatch between legal obligations and insurance protection. For U.S.-based professionals — whether in New York, California, Texas, or Illinois — the safest approach is prevention: involve your insurer and legal counsel before signing, insist on policy-consistent indemnities and caps, and price or refuse work that would expose you to uninsured, potentially catastrophic losses.

External resources

Internal resources

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