Does Business Insurance Cover the Breach of Contract?

Contracts are at the heart of many business transactions. Disagreements can arise between companies and clients regarding services rendered, such as lack of completion or poor quality. Does business insurance coverage protect these scenarios? Here’s a look at the degree to which business insurance covers breach of contract.

What Is a Breach of Contract?

A breach of contract occurs when a business needs to live up to its obligations stated in an agreement. The two types of contract breaches are immaterial and material. While an immaterial breach relates to minor or partial term violations, material breaches are more severe and indicate financial harm.

Regardless of what type of breach claim is filed, court cases can be expensive. Your business insurance coverage pays for legal fees, but you must review your policy carefully to ensure.

What Happens If Your Client Sues for Breach of Contract?

If your business faces a breach of contract lawsuit filed by a client, the case could go to a state court. But if each party is from a different state or federal law violations are alleged, the case could be tried in a federal court. Here are the types of damages that can be awarded to the plaintiff:

  • Restitution: The court may order your business to repay funds the client paid your company.
  • Compensatory damages: These damages might reflect losses caused by the breach, and future losses.
  • Specific performance: You may be ordered to deliver what your contract promised.
  • Punitive damages: Depending on the nature of the breach, your company may be ordered to pay additional fees determined by the court.

Who Is at Risk for a Breach of Contract Lawsuit?

All businesses that operate on written contracts are at risk of being sued by a customer for breach of contract. Many times, these claims are filed due to a company’s negligence. Firms that derive their income from consulting services are at risk of getting blamed for something that goes wrong.

What Insurance Could Protect You from Breach of Contract Lawsuits?

There are various types of business insurance to cover breach of contract scenarios, assuming the breach was accidental. No insurer wants to pay for an intentional breach of contract. An Errors and Omissions (E&O) policy will cover the following contractual disputes:

  • Professional errors in decision-making and performance
  • Incomplete or lack of services
  • Missing a project deadline
  • Unforeseen higher costs

How Do I Avoid Accusations of Breach of Contract?

The best way to avoid a breach of contract showdown with clients is to start with fair easy-to-read contracts that detail the services involved. Your contract can contain clauses to hold your firm harmless. An “Act of God” clause sometimes allows for contract suspension. Make sure the contract is thorough and clear without overpromising anything.

Get Answers to Your Business Insurance Questions with Locke Insurance!

Your business insurance coverage may pay for breach of contract court cases if you include an E&O extension. To learn more about getting the right coverage for your operation, contact us today at Locke Insurance Group. Let us help you customize a plan for your business.

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