A construction company recently filed a breach of contract lawsuit against the city of Wichita Falls, Texas. As reported in the Times Record News, Mitchell Enterprises Ltd. contracted with the city for a project at the Wichita Falls Regional Airport. The contact gave Mitchell 242 days to finish the job and included a clause stating the city could assess damages if the company missed the deadline.
When the deadline arrived, only 40 percent of the work was complete. The city began assessing damages at the rate of $1,000 per day. However, Mitchell claims factors beyond its control put the project behind schedule. Now the company is suing to recover $288,000 in damages, plus attorney fees and interest.
So, will Mitchell Enterprises' construction insurance pay for the legal fees? In a word, no. Most construction insurance policies only pay lawsuit costs when your business is sued. Lawsuits you initiate generally come out of your own pocket.
Why Construction Insurance Doesn't Cover Lawsuits You Start
Construction business insurance is the last line of defense for your business. It's there to help if you're sued over incidents such as…
- An injury at your workplace.
- Property damage.
- Failure to complete a project on time.
(Related reading: "Top 5 Risks for Contractors, Builders & Other Construction Professionals")
However, construction insurance typically doesn't cover lawsuits when you're the plaintiff. You might argue that suing someone is a just another way to protect your business, but it's also optional. You don't need to file a lawsuit against a third party, so the legal costs end up on your shoulders.
By contrast, you have no choice when someone sues your business. You have to engage with the lawsuit. Even if you don't respond to the complaint, the plaintiff can be awarded a default judgment that you have to pay – and you don't want that.
You can also protect your business by minimizing the chance you have to make a claim your construction insurance. See some examples in "Construction Busy Season is the Perfect Time for a Risk Management Check."
How to Manage the Risk of a Contract-Breaching Client
Lawsuits can be expensive and time-consuming. Before you sue a client over breach of contract, try some of these solutions first:
- Set up an installment plan. Getting your money over time is better than never getting it at all. Talk to your non-paying client about paying some of their bill every month.
- Sometimes it's better to come up with an amicable solution, like offering a discount to an unhappy client. That may be frustrating to do, but it's usually better than spending time and money in litigation.
- Hire a mediator. Negotiations can go sideways when people are entrenched in their positions. Having a neutral third party can often help both sides work together to come up with an acceptable solution.
- Write it off. Depending on the situation, you might be better off simply walking away from a difficult client. Chalk it up as a learning experience and be more careful about the clients you take on in the future.
For more risk management tips, read our eBook The House Insurance Built: Risk Management for Builders & Contractors.