Professional Liability Yes - Entrepreneurial Risk No:
Limits of Coverage in Professional Liability Policies in the Construction Industry
Mar 18, 2026
By: Itzick Simon
In the construction industry, it is sometimes assumed that a professional liability policy provides broad protection against claims related to a project. In practice, however, the scope of coverage is more limited: the policy is intended to cover liability arising from professional errors or negligence, but it is not meant to assume the entrepreneurial business risk of the project.
The construction sector involves the participation of many professionals: engineers, architects, project managers, contractors, and developers. Each operates within their professional role and bears responsibility arising from the exercise of professional judgment.
Alongside professional liability, there is also entrepreneurial business activity, which inherently involves making economic and managerial decisions and dealing with a variety of business risks.
For example, a developer may enter a project based on the assumption that it will be possible in the future to expand building rights, exceed existing permits, advance planning changes, or improve the project’s financing and economic feasibility. Decisions of this type are an integral part of the activity and the entrepreneurial risk itself. They reflect the developer’s business judgment and willingness to take risks in anticipation of entrepreneurial profit.
The distinction between professional liability and entrepreneurial risk is fundamental in the insurance world. In practice, however, the construction industry often experiences ambiguity regarding the limits of insurance coverage.
One common misconception is that a professional liability policy also covers exposures arising from the project’s entrepreneurial activity. In many cases, the opposite is true.
Professional liability in the construction industry
Professional liability insurance is intended to cover liability arising from the practice of a recognized profession and the exercise of professional judgment במסגרת professional activity.
Such policies are typically purchased by professionals such as engineers, practical engineers, architects, and project managers.
In Israel, it is also common for many contractors to be insured under professional liability policies, among other reasons due to requirements במסגרת engagements with project owners, insurance advisors, and various authorities. These policies provide coverage for liability arising from the exercise of professional judgment in the course of performing the works.
However, even when a contractor is insured under such a policy, the scope of coverage is determined according to the definition of the insured profession, the policy terms, and the exclusions included within it.
In practice, many claims in this field arise precisely in situations where the boundary between professional liability and execution or developer liability is unclear. Often, only after an incident occurs does it become evident how significant the definition of the insured profession and the scope of coverage under the policy actually are.
A natural question that arises in this context is whether the very activity of entrepreneurship can be considered an insurable profession under a professional liability policy.
The accepted answer in the insurance market is negative.
Construction entrepreneurship is not a professional service provided to the client, but a business activity in which the entrepreneur acts as the owner of the project and as the entity bearing the economic and managerial risks of the venture.
Regarding entrepreneurial activity, it should be remembered that this is a business activity aimed at generating entrepreneurial profit. This activity involves making economic and managerial decisions and dealing with a variety of business risks, such as market conditions, execution costs, contractual agreements and overall management of the project, as well as planning risks relating to the scope of building rights that can be actually realized, including reliance on expanding the building permit, receiving easements or promoting a planning change.
These risks are an integral part of the activity and of the entrepreneurial risk itself.
Insurance is intended to cover liability arising from professional error or negligence. It is not intended to transform an entrepreneurial business risk - taken from the outset with the expectation of profit - into an insured risk.
In other words, an insurance company can insure a professional error. It cannot share in the entrepreneur's business risk.
Is construction entrepreneurship a profession that can be insured for professional liability?
The reality in the construction industry is even more complex when the same company plays multiple roles in a single project.
For example, many companies have internal planning or project management units that provide services for the company's own projects. In such situations, the question sometimes arises as to whether this is professional liability to a third party or entrepreneurial risk for the project owner.
In some cases, disputes of this type also reach the desks of insurance companies after a project failure occurs.
Therefore, it is important to carefully examine the company's operational structure and the wording of the policy, especially when the company operates in several hats on one project.
The complexity of integrated companies
When a significant malfunction occurs in a construction project, responsibility does not always stop at the company level alone.
Sometimes claims may also arise against company officers, claiming that they were negligent in making decisions regarding project management.
This type of liability is not generally included within a professional liability policy, but rather within officers' liability insurance.
Possible implications for office holders
Understand the limits of coverage
Recent years have shown that these questions are not purely theoretical. In cases of significant failure in a construction project, the issue of insurance coverage limits almost always emerges as a central point of dispute between the parties.
The increasing complexity of the construction industry requires a more precise understanding of the risk structure within projects.
Professional liability insurance is an important tool in managing risk for companies in the sector. However, it is not intended to cover every risk associated with a construction project.
The distinction between professional services and entrepreneurial activity is not merely a legal or underwriting issue. It can determine whether, in the event of a project failure, the company will have insurance protection—or whether it may find itself exposed to substantial claims without appropriate coverage.
In an industry where projects can reach hundreds of millions of shekels, a precise understanding of liability boundaries and insurance coverage is an integral part of a company’s risk management.
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