Disputes thrive in contract ambiguity. (Adobe Stock)
Insurance carriers and agents spend a lot of time working with contractors to ensure coverage limits, exclusions and endorsements are designed to best protect them. Yet one of the most persistent sources of loss in the construction sector has nothing to do with policy language. It starts earlier, even before the first meeting is scheduled or permit application is filed.
Contractors' biggest risks lie in the contracts they sign, and sometimes draft, themselves.
For many small- to mid-size contractors, legal agreements are assembled out of necessity, not strategy. Too frequently, they are cobbled together as the result of an online search for templates with a little customization by the contractor, cutting and pasting from random documents or by borrowing liberally from a master services agreement from another job. Even if the contractor passes them on to a lawyer, often these attorneys are generalists who may not specialize in construction or even contract law.
These shortcuts, and the disconnected language they create, are driven by the desire to save money. But they can quickly damage even the most carefully structured risk transfer efforts of insurers.
Broad language shifts unintended risk
One of the most common mistakes in these situations is the use of sweeping indemnification and hold-harmless clauses. Language that sounds protective can, in practice, push responsibility to a contractor that is not covered by their insurance policies, leaving the contractor on the hook for any resulting claims.
Consider a small framing contractor who signs a subcontract with a larger general contractor requiring indemnification for all claims arising from the project. When a loss occurs that is only tangentially related to their work, the contractor may find themselves defending claims well beyond their scope, often without coverage.
Not only is this a risk transfer failure, it's also dangerous. Broad indemnity clauses can trigger contractual liability exclusions or exceed insured contract definitions, leaving well-intended contractors exposed.
Misalignment between contracts and coverage
Another frequent issue is the disconnect between contractual insurance requirements and the actual policies in force. Contracts may demand coverage types, limits or additional insured status the contractor does not carry or cannot realistically obtain.
A common example involves primary and noncontributory wording, or a waiver of subrogation requirements, embedded in boilerplate agreements. Contractors sometimes sign first and ask questions later, only to discover during a claim that their policy does not satisfy the contract's terms.
This misalignment creates friction at the worst possible moment. The contractor feels unprotected. The agent is left explaining why coverage does not respond as expected, and the carrier is forced into a defensive position.
When the scope becomes the dispute
Disputes thrive in ambiguity. Yet many contractor agreements rely on vague or recycled scopes of work that fail to properly define responsibilities, deliverables or limits.
A concrete subcontractor who used a generic scope of work from an online template or old agreement can create a legal dispute if, for instance, cracking appears months later. If the general contractor's claims responsibility extends to unrelated site preparation issues and the subcontractor disagrees, insurance will not resolve the disagreement because the dispute centers on contract interpretation, not bodily injury or property damage. The only way to resolve these types of disputes is to go the legal route.
Undefined scopes create fertile ground for finger-pointing, payment disputes and costly litigation that can take months or years to resolve.
Problematic internet legal templates
Broadly speaking, one of the biggest risks for contractors is relying on online word templates, a quiet but frequent default for many contractors. They are free, fast and appear authoritative. Generic by design, these templates are drafted without regard to jurisdiction, state laws, trade specific risks or insurance policy nuance.
When problems arise, contractors often, and wrongly, assume insurance will sort it out.
These agreements fail to clearly address how disputes or changes will be handled. Language around change orders is vague. Generic dispute resolution clauses push parties to litigate, often without incorporating mediation or other early resolution mechanisms that can better address the situation while also saving money.
Where insurance ends...
Insurance remains essential but it is not designed to fix poor contracts. Increasingly, carriers and agents are recognizing the value of complementary solutions that go beyond the nuance of insurance policies to help contractors manage legal risk before disputes arise.
Access to affordable contract tools, document review resources and early dispute resolution support can materially reduce uncovered legal exposure. These services strengthen agent relationships and reinforce proactive risk management.
A broader view of risk transfer
Risk transfer does not begin with an insurance policy; it begins with the contract. When contractors rely on poorly drafted agreements, even the best insurance program can be undermined.
In January 2025, Reuters reported on the growth of the alternative legal services market, driven by the demand for cost-effective legal work for small- to mid-sized businesses. The article noted these services are increasingly employed alongside or in addition to other traditional services, including insurance. As a value-add or bolt-on, affordable legal services that help businesses like contractors to create customized legal documents to address and transfer their specific risks, in the cities and states where the work is being done, are game changers. They offer the potential to reduce litigation costs and nuclear verdicts, often at extremely affordable rates.
For carriers and agents who identify and incorporate these services into their offerings to insureds, not only can they create new and risk-free revenue streams in certain cases, they can become key assets in their client retention efforts.
By helping insureds recognize the value of addressing, and avoiding, common contract mistakes, encouraging alignment between agreements and coverage and supporting broader risk management strategies, carriers and agents protect more than a single project. They help protect the long-term viability of a contractor's business.
That is value clients notice — often before the first claim is ever filed.
Grahame Cohen (grahame@epoqlegal.com) is founder and CEO of Epoq North America, a legal Insurtech protecting businesses and consumers from legal and compliance risks since 1997, with services provided to more than 60 major brands and insurance carriers in the U.S., Canada, U.K. and Republic of Ireland.
Opinions expressed here are the author's own.
(Image credit: TEEREXZ/Adobe Stock)
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