It started with “just one more tweak.” Three months later, the project had doubled in size, but the budget hadn’t. When I finally put my foot down and paused work until payment, the client sued me for “abandonment” and “incomplete deliverables,” demanding the return of the deposit plus damages. I wasn’t just out the money they owed me; I was being sued for trying to collect it.
Key Takeaways
- Counter-claims are covered: If you sue a client for fees and they sue you back for negligence (a common tactic), E&O insurance defends the negligence claim.
- Fee disputes are NOT covered: Insurance will not help you collect your unpaid invoices. They only defend you against the client’s attack.
- “Contractual Liability” Exclusion: Ensure your policy doesn’t exclude all contract disputes, or you have no coverage.
- Paper trail is King: Your emails proving the scope creep are your defense.
The “Why”: The Breach of Contract Trap
Most E&O policies state they will pay for “amounts you are legally obligated to pay” due to negligence.
The Trap: The carrier might say, “This is a commercial dispute, not a professional error. You two just disagree on the price.”
However, once the client alleges “Incomplete Work” or “Substandard Work,” it triggers the “Wrongful Act” definition in your policy. The carrier must defend you against the allegation of bad work, even if the root cause is a billing dispute.
The Investigation: I Quoted 3 Major Carriers
I asked carriers: “If a client sues me because I stopped working due to non-payment, am I covered?”
1. NEXT Insurance
- The Analysis: They are cost-effective but strict. If the claim is purely about the contract terms, they might deny it. However, if the client throws in “negligence,” NEXT has to step in.
2. Hiscox
- The Analysis: Hiscox is very familiar with this scenario. They know that 90% of freelance lawsuits start as fee disputes. They generally provide a defense for the “negligence” portion of the counter-claim.
3. LegalShield (The Alternative)
- The Analysis: This isn’t insurance; it’s prepaid legal services. For scope creep and collections, this is often better than insurance. They can write a demand letter for you. But if you get sued for $50k damages, you need real insurance, not just a letter writer.
[IMAGE: Screenshot of a “Stop Work” clause in a standard design contract]
Comparison Table: Scope Dispute Defense
| Carrier | Defends Counter-Claims? | Helps Collect Fees? | Cost | Best For… |
| Hiscox | Yes | No | | Defense against lawsuits |
| NEXT | Limited | No | $ | Budget conscious |
| LegalShield | No (Advice only) | Yes (Letters) | $ | Contract disputes |
Step-by-Step Action Plan
- Audit the Scope: Create a document listing the original scope vs. the requested changes. Assign a dollar value to the extra work.
- Report the Counter-Claim: As soon as the client says “lawsuit” or “damages,” notify your E&O carrier.
- Separate the Issues: Your lawyer will file a motion to dismiss the negligence claim, isolating the billing dispute.
- Check “Withholding of Services”: Does your contract explicitly allow you to pause work for non-payment? If yes, you are in a strong position.
FAQ
Can I deduct my legal fees from what the client owes me?
You can try, but you’ll likely never see that money. The goal here is to avoid paying them.
Does insurance cover the money I lost?
No. E&O is liability insurance (protecting you from paying them). It is not “Accounts Receivable” insurance.
What is a “Retainer for Defense”?
If you don’t have insurance, you have to pay a lawyer ~$5,000 upfront just to answer the lawsuit. E&O covers this immediately.