Building a Sturdy Business
How to Use Client Contracts to Reduce Contractor Liability

Using business contracts is a smart way to limit your contractor's liability. But before we look at how legally sound contracts can spare your business from an expensive lawsuit, let's recap what business contracts do:

  1. Define the project scope. In other words, detail exactly what work you're supposed to do.
  2. Outline when you will finish the job. If project timelines change, be sure to add an addendum.
  3. Clarify payment terms. This should explain when, how much, and how you will be paid.
  4. Specify the process for resolving disputes. If a problem arises, this section outlines how it will be handled. Many contracts also include indemnification clauses, which can limit your liability for losses and accidents.

These form the basics of any business agreement. Clarifying them will go a long way to curbing any problems before they get out of hand.

In this guide, we'll focus primarily on how contracts can define and limit your contractor liabilities, i.e., what you are responsible for and when you can be sued.

How Contracts Protect Construction Businesses from Lawsuits

How Contracts Protect Construction Businesses from Lawsuits

When you hire a lawyer to write a contract, the goal is to produce one that limits your liability. That means the contract includes clauses that…

  • Explain what you can't be sued for.
  • Limit the amount of money you can be sued for.

Ideally, contractors would hire a lawyer every time they needed to sign a new contract. But as you know, lawyers are cost-prohibitive for many small-business owners. So what do you do?

One common approach is to hire a lawyer to write a series of "boilerplate" contracts. Your lawyer could write generic contracts for each type of project you work on. When you get a new client, you can fill in their name and information in the generic contract.

Contracts and Insurance: A Risk Management Duo

Contracts and Insurance: A Risk Management Duo

Contracts limit and define your lawsuit risk, while contractor liability insurance pays for lawsuit expenses in the event you are actually sued. You need both contracts and insurance for a solid risk management plan.

This is also true from a client's perspective. Many clients require that you have business insurance before you can start work. Clients want to work with insured contractors because it assures them that you have the financial backing to compensate them if something goes wrong.

Before you sign a contract, clients might require you to have the following policies:

  • General Liability Insurance (aka Contractor's Liability Insurance). This policy pays for damages and disputes over your construction projects. For example, if your work hurts someone or damages property, you could be sued for those expenses. When that happens, you can make a claim on your GL Insurance to cover your legal defense costs and settlements or judgments.
  • Builder's Insurance / Builder's Risk Insurance. This is a Property Insurance policy that covers your materials, equipment, and the structures you are building at a client's property.

When a client asks if you're insured (or requires it in a contract), you can show them a Certificate of Liability Insurance. This certificate is a single-page document that lists your active liability policies and their pertinent information. You can request one from your insurance agent, or if you're an insureon client, you can log in to your customer portal and download one yourself.

Free Quotes on Builder's Risk and Contractor's Liability Insurance

Free Quotes on Builder's Risk and Contractor's Liability Insurance

As a construction professional, you know the importance of an accurate cost estimate. It will help you and your clients adequately plan a project.

We provide free insurance quotes on independent contractor's liability insurance for the same reason — to help you budget and plan. Submit an online insurance application, and we can send customized insurance quotes from an agent who specializes in construction liability coverage.

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