Article Reviewed by a licensed insurance professional: Sam Meenasian (CA dept of insurance license #0F75955).
Estimated reading time: 11 minutes
Key Takeaways
- Contractors often face lawsuits due to vague contracts, poor workmanship, and safety compliance issues.
- To avoid legal problems, always define job scopes clearly and ensure written contracts are in place.
- Maintaining high-quality work and communication with clients protects your reputation and reduces conflict.
- Proper insurance coverage is essential; review and update policies regularly to fill gaps.
- Document everything related to a job to prevent misunderstandings and potential legal issues.
Running a contracting business requires so much more than just laying tile or painting walls. You need to juggle clients, crews, materials, deadlines, and above all else, risk. One poor judgment call can easily land you in the middle of a costly legal battle, which can damage your finances and your reputation. Contract disputes and jobsite incidents are more common than most contractors expect, and a small misunderstanding could escalate quickly.
This guide will cover the most common mistakes that lead to contractors getting sued. We will also discuss what you can do to avoid this negative outcome and protect your business so that it can thrive for years to come.
Reasons that Contractors Get Sued
1. Vague Contract Language and Unspecified Scope
One of the worst things that you can do as a contractor is to fail to fully define the scope of jobs and write vague contracts that don’t provide enough details. You might be shocked to know that many contracts start with a quote that is scribbled on some scrap paper, and a formal contract is never written to cover the details of the job.
When there are issues a few months later, the fact that there isn’t a real contract is a huge issue. The dispute then comes down to your word against your customer’s word, which is never a good situation. This is where lawsuit territory is located, and you want to stay well away from the lawsuit space.
Here is how these kinds of problems happen:
· Let’s say you agree to install new flooring for a client. The client never specifies what flooring they want, but they think you mean engineered hardwood. You show up with laminate to install in their home, and they are not pleased.
· You agree to build a deck for a client. They think they are getting a pergola, top-quality hardwood decking materials, and custom seating. None of this was mentioned, and now they are furious with you.
· You process a change order for a client, and they give verbal approval. However, when you move forward, and the change has led to added cost, they suddenly refuse to pay, claiming you never told them about this change.
When the contract is incomplete, and the details are not written down when changes or negotiations need to happen, confusion can occur down the road. This confusion can lead to hard feelings, anger, and legal wrangling that every contractor should want to avoid.
How to protect yourself:
1. Write down every single detail about the job, the bid, and things like timelines and budgets. Be clear about scope, materials, deadlines, payments, and exclusions.
2. Include information about change orders and make sure that all changes are approved in writing.
3. Communicate often and make sure that communication is clear. Email and text are highly useful for confirming changes since they are written forms of discussion.
4. Take before-and-after pictures of each phase of the work that you are doing.
Your contract is critical to your business success. Don’t let yourself down by assuming a contract is just meaningless busywork.
2. Poor Workmanship and Taking Shortcuts
One of the most common problems in construction and contracting as a whole is taking shortcuts or settling for work that is subpar and hoping that the client won’t notice. Sometimes, clients don’t, but when there are issues with things failing or starting to look bad, your shortcut and poor craftsmanship can come home to roost.
You want to be sure not to do things like substitute lower-grade materials than what you promised to use for a job, just because you’re in a bind. You also should be sure that you don’t allow the work of staff who are not up to snuff to pass unnoticed. At the end of the day, you may pay more in legal fees than you saved in cheaper materials or in leaving something as-is that should have been done over.
How to protect yourself:
1. Never sub out materials without written approval.
2. Make sure to keep documentation of suppliers, products, and specs for everything that you do for each job.
3. Create quality control checklists and make sure that your teams of staff use them reliably.
4. Schedule time for fixes and make sure that inspections are requested. Rushing can lead to making mistakes.
5. If something seems like it’s not right, you or one of your team leaders needs to check on it. Don’t just hope for the best and then end up in court because you didn’t take the time to check.
Delivering quality work is about more than just your pride. It’s what gives your business legal protection. Your quality craftsmanship acts like a legal shield and protects your business’s reputation.
3. Safety and Compliance Issues
Every contractor is made fully aware of the various safety regulations that they need to follow. Quite plainly, there is no excuse for safety and compliance issues, and yet, they happen on a routine basis. In some cases, a sub is responsible for the poor quality work, but that is no excuse. Even when you subcontract your work, you may still be legally responsible for jobsite conditions and the finished work, depending on the contract terms and the facts of the incident.
A single safety or compliance issue could affect your business. Imagine this: you own a roofing business, and one of your subs falls off a roof. He is seriously hurt, and there is property damage to boot. His own insurance expired last month. Who is left holding the bag?
A serious injury can pull multiple parties into a claim. Depending on the facts, you may be accused of negligence or unsafe site control, which could lead to legal defense costs and potential liability.
How to protect yourself:
1. Check on permits and licenses before you start jobs.
2. Train new hires properly on site safety.
3. Verify that subs have their own insurance and that it is current.
4. Classify workers properly so that they are considered in your workers’ compensation policy
5. Keep incident logs and check on inspection reports.
6. Assign a person who monitors compliance, and make sure that you operate your company with a positive safety culture.
7. Have daily safety huddles and document attendance.
Safety is about so much more than avoiding accidents; it is also about proving that you take the time to do due diligence and that you do everything that is possible to keep your workers safe. When lawsuits happen surrounding compliance and safety, you need to have all of your ducks in a row. Excuses may never fly.
4. Poor Communication and a Lack of Documentation
There are a few businesses that couldn’t stand to improve communication between teams and between leadership and workers. You may avoid many legal problems and a ton of stress just by fostering a culture of communication at your company.
An example of this kind of problem is a delivery delay that pushes the work schedule out for another week. You might have mentioned it on the job site and figured everyone understood what was going on. However, the client and some of your staff didn’t understand. Workers show up and do work they should have waited to do, and you have to bill the client in spite of saying that nothing was going on for a week.
This kind of screw-up can lead to frustration on all sides and might also cause your team to need to do some of the work that they completed over again when the new materials show up. You have wasted time and money and broken trust with your client all in one fell swoop.
How to protect yourself:
1. Keep a daily log and record the crew, the work that is done, issues, and anyone else who was on-site that day.
2. Take photos of each stage of the job.
3. Email summaries of all conversations to clients and subs.
4. Store everything, even your texts, in a single place.
5. Follow up after the completion of the job with the client and make sure that they verify that they are satisfied in writing.
Communication is about so much more than the goodwill of your clients and workers. It also ensures that you may avoid unnecessary legal battles and damage to your reputation.
5. Inadequate or Incorrect Insurance Coverage
Sometimes, the problems that lead to legal issues are not with the quality of your work or issues with communication. Sometimes, the problems that lead to legal issues have everything to do with your insurance, or a lack thereof.
Commercial general liability typically addresses third‑party bodily injury and property damage claims arising from your operations, but it doesn’t cover every risk a contractor faces. There are many additional insurance coverages that companies may consider to protect themselves against issues that crop up from time to time.
An example is a contractor who was sued over a structural issue that cropped up related to a sub’s faulty work. When the contractor filed a claim, he was informed that subs were not covered by his policy. Some policies restrict or condition coverage for subcontracted work (for example, requiring written contracts, certificates, or specific endorsements). Claims may be affected by exclusions, misclassification issues, or failure to meet policy conditions.
Here are the policies that you might need to have to protect your company:
· General Liability Insurance — covers third-party injuries and property damage.
· Professional Liability Coverage (E&O) — covers design and advice-based claims.
· Workers’ Compensation Insurance — Workers’ compensation is mandatory in most states.
· Tools & Equipment Insurance — protects gear and equipment used daily.
· Commercial Auto Insurance — protects drivers working for you and business-use designated vehicles.
Things to consider when looking at these policies are low policy limits that don’t match the size of the jobs that you work on, a lack of coverage for subs, and exclusions that are buried in fine print. Having poor quality insurance is sometimes as bad as having none if the policies are not correct for your use case.
How to protect yourself:
1. Review all your policies with a skilled insurance professional on a routine basis to make sure your coverage is correct.
2. Set limits based on contract requirements and realistic worst‑case loss scenarios (injury severity, property values, completed operations exposure, and venue).
3. Keep certificates of insurance from all your policies and from every subcontractor on hand. A certificate of insurance is informational and doesn’t, by itself, grant coverage. When you need additional insured status, request the actual additional insured endorsement (Most commonly CG 2010 and CG 2037 Endorsements).
4. Update your insurance agent each time your business changes or you grow as a company.
5. Make sure that you have additional coverages as needed to handle job specifics
Insurance does so much more than just protect you from having to pay for medical bills or the cost of replacing machines and equipment. It also helps you to protect your business from legal problems related to things you never thought of until they came to pass. The right insurance is the safety net that gives you peace of mind at all times.
Key Takeaways
1. Be precise about the scope of your jobs and make sure that you have written contracts for everything. Make changes in writing and save documentation on every step of the job.
2. Don’t accept rushed work that might impact quality. Poor quality materials and shoddy work may lead to damage to your reputation and potential legal costs down the road.
3. Play by the rules and know permitting laws, classification laws for your staff, and any other required rules related to your industry.
4. Make sure that everything that happens related to a job is recorded in written form. No handshake deals or verbal agreements should be used in your business dealings.
5. Make sure that your insurance is correct for your use case and that it covers you fully.
Running a contracting business requires that you wear many hats and know a ton about your industry and the various details that are required to complete jobs correctly and on a timely basis. You can’t let lawsuits destroy your business simply because you quit paying attention to the details.
At USA Business Insurance, we help contractors in many trades compare coverage options and close gaps based on their contracts and job exposures. We understand what can happen when contractors don’t have the right insurance in place to protect their business or don’t understand the risks of making errors in judgment. We work as partners alongside our clients to ensure that they have the insurance protections they need to maintain a business that thrives for years into the future.
If you’re ready to protect your business the smart way, reach out for a quote today.
