Defending Texas Contractors and Project Owners in Construction Insurance Disputes

When a third party sues your company over a construction project, the first question is usually about insurance: will your carrier defend you, and will it indemnify you if the judgment goes the wrong way? For many contractors, project owners, and design professionals operating on large commercial projects in Texas, that question does not have a clean answer. Coverage is disputed, reservation of rights letters arrive, and the company that was supposed to be in your corner is suddenly scrutinizing every clause of your policy to find a reason to step back. That is when having a construction litigation attorney who understands both sides of the coverage equation becomes essential.

Fahl & Donaldson represents contractors, project owners, sureties, and lenders in Texas when construction insurance disputes threaten their ability to mount an effective defense. Our construction litigation team has over 100 years of combined trial experience and represents clients across the full spectrum of commercial project disputes — from industrial facilities and chemical plants to power generation infrastructure, pipelines, and large-scale commercial buildings throughout the Gulf Coast region and statewide.

What Happens When Your Insurer Disputes Coverage After a Construction Claim?

Commercial construction projects in Texas typically involve multiple layers of insurance, and the policies governing who pays what — and when — are among the most contested documents in the construction industry. A third party sues a contractor or project owner, suit papers are served, and the covered party tenders the claim to their carrier. What comes back is often not a clean acceptance of defense.

Carriers have three options when a claim is tendered: they can accept the claim and provide an unqualified defense, accept the claim while issuing a reservation of rights letter preserving their ability to deny coverage later, or decline to defend entirely. Under Texas law, insurers are bound by the “eight corners rule” — meaning the duty to defend is determined by comparing the allegations in the plaintiff’s pleadings against the language of the insurance policy. If the claims potentially fall within coverage, the insurer must defend the entire suit. But carriers regularly challenge whether that threshold is met, and a reservation of rights creates a conflict of interest that can affect how the assigned defense counsel approaches your case.

When an insurer improperly denies a defense or issues a reservation of rights in bad faith, policyholders in Texas have remedies under the Texas Insurance Code and the Prompt Payment of Claims Act. The stakes go well beyond the claim itself: a contractor defending a multimillion-dollar construction defect suit without insurer-funded counsel, or with counsel whose loyalty is compromised by a conflict, is in a materially weaker position than one whose coverage position is clear.

What Types of Construction Insurance Disputes Does the Firm Handle?

Construction projects generate coverage disputes in several recurring patterns. The following represent the most common situations where contractors, owners, and other commercial parties find themselves managing litigation while simultaneously fighting their own insurer.

• CGL coverage denials for construction defect claims: Insurers routinely argue that faulty workmanship does not constitute an “occurrence” under a commercial general liability policy, or that the “your work” exclusion bars coverage. Texas courts continue to refine these standards, and the outcome turns heavily on policy language and the specific facts of each project.
• Builder’s risk policy disputes: According to the Texas State Office of Risk Management, builder’s risk insurance protects construction projects against physical loss or damage during construction. When damage occurs and a carrier invokes exclusions for faulty workmanship, design defects, or damage outside the policy period, the project owner or contractor named as an insured must challenge those positions while simultaneously defending the underlying tort or contract claim.
• Additional insured disputes: Construction contracts routinely require subcontractors to name general contractors, project owners, or lenders as additional insureds on their CGL policies. When a third-party claim implicates a subcontractor’s scope of work and the carrier challenges whether the additional insured endorsement is triggered, the general contractor or owner is left to fund their own defense while the coverage dispute plays out.
• Reservation of rights and independent counsel: When an insurer accepts a defense under a reservation of rights, it may retain the right to later deny indemnity even after controlling the defense. Under Texas law, a reservation of rights can create a disqualifying conflict of interest entitling the insured to select independent counsel at the insurer’s expense — but only when the facts to be adjudicated in the underlying lawsuit are the same facts on which coverage depends.

On projects spanning multiple policy periods, carriers routinely dispute which policy year is triggered and how defense costs should be allocated. Texas recognizes an injury-in-fact trigger for occurrence-based CGL policies, meaning each insurer on whose policy period property damage actually occurred bears a defense obligation — but coordinating that obligation across carriers requires aggressive legal management.

Does Having Insurance Automatically Mean You Have a Defense?

Not in practice. Being named in a construction lawsuit does not guarantee your carrier will fund your defense, and even a carrier-provided defense may not serve your interests fully when a reservation of rights is in play. The risks are particularly acute in disputes involving the following:

Construction defect claims alleging damage caused by the work of a subcontractor rather than the named insured directly — which implicates the subcontractor exception to the “your work” exclusion and can create coverage where carriers argue none exists. Claims involving damage that allegedly progressed over multiple policy periods — which can trigger disputes across multiple carriers over when physical damage actually occurred and which policy must respond. Claims where the insurer-appointed defense counsel faces a conflict because the same facts that determine liability also determine whether the policy covers the loss.

These are the situations where independent legal counsel — counsel whose loyalty runs to the insured alone, not to the carrier — makes a measurable difference in the outcome of both the coverage dispute and the underlying construction litigation.

How Fahl & Donaldson Approaches Construction Insurance Defense

Our work in this area sits at the intersection of insurance defense and construction litigation. When a client is sued on a commercial construction matter and coverage is disputed, we handle both sides of that equation — representing the client in the underlying construction dispute while advising on how to position the coverage claim to preserve maximum policy benefits.

This includes reviewing reservation of rights letters to determine whether an independent counsel obligation has been triggered, documenting the insurer’s claims handling to preserve rights under the Texas Prompt Payment of Claims Act and the Texas Insurance Code, and if necessary, pursuing the carrier directly when a coverage denial is improper. We also counsel clients on breach of contract claims arising from the underlying construction dispute and coordinate across business litigation matters that involve competing insurance and indemnity obligations among multiple project parties.

Contact Fahl & Donaldson for Construction Insurance Defense

If your company has been sued on a construction project and your carrier is disputing coverage, delaying a defense, or issuing a reservation of rights, the time to consult litigation counsel is now — not after the insurer has shaped the defense strategy or the policy position has hardened. 

Fahl & Donaldson represents contractors, owners, and other commercial parties on the defense side of construction insurance disputes throughout Texas. Use our online contact form to describe your situation and schedule a consultation.