Does Construction Insurance Cover Lawsuits You Initiate?

Imagine you contract with the town to build a new administration building at a nearby school. The town gives you 300 days to finish the job, but includes a clause that says the town can assess damages to your business if you miss the deadline.

The deadline arrives sooner than you thought, and only 60% of the work is completed. As promised, the town starts assessing damages at $1000 per day. You claim that circumstances beyond your control put the project behind schedule, such as multiple days of rain. However, the town still keeps assessing damages, which leads you to file a breach of contract suit against the town in the amount of $100,000 to cover the damages, attorney fees and interest.

In this situation, would your insurance company cover the lawsuit initiated by your business? No, most policies only pay lawsuits when your business is sued not the other way around.

Why Isn’t My Lawsuit Covered?

While you have no choice but to engage in litigation when someone sues your business; you do have a choice when it comes to initiating a lawsuit.  Think about it, why would an insurance company pay the expenses to cover a lawsuit that you initiated by your own free will?

Now, filing a lawsuit might be the best thing to do so a judge can deem that you don’t owe anything to the town, but the legal fees associated with getting the judgment would rest on your shoulders.

Of course, the better solution is trying to prevent these risks from occurring in the first place.

Managing the Contract-Breaching Client

You can prevent a breach of contract by following one of our trusted tips:

  • Don’t sign anything that you are uncomfortable with. Negotiate the clause about damage assessment to give leeway for circumstances beyond your control.
  • For contractors suing for non-payment, set up installment plans for each portion of the contract and don’t wait till the end to receive all your money for the job.
  • Offering a discount to an unhappy client can help you avoid litigation and might deter the client from assessing you damages.
  • Hire a neutral, third-party that can help the client and you reconcile differences and come to an amicable solution.

We highly recommend that our construction business clients know what is and what is not covered by their insurance policy. Give John Quinn a call at 617-612-6533 to discuss your policies today!