Understanding Contractor Insurance

There are two types of insurance that you as a homeowner need to be concerned with and they are workers compensation and general liability insurance. There is also a third type of insurance in the form of being bonded that may be needed. Contractors only need to be bonded if they work on public/government projects or if the work is valued at more then one hundred thousand dollars. General liability insurance protects your property from damage and non employees should they get injured on a job site. Workers compensation protects employees should they get injured. It seems pretty straight forward, however there are some unreputable contractors will put the uninformed homeowner at financial risk to get the job. Let’s talk a little about the three different types of insurances before we have a discussion about how unsavory contractors try  and pull a fast one on homeowners.

General liability insurance

This insurance is cheaper then workers compensation insurance and protects your property, and other people not connected to the contractor such as your friends and family. Liability insurance policy have caps on just how much money the insurance company will pay out. The lower the cap the cheaper the insurance. When I first started in the construction industry general contractors use to require that the subcontractors they hired had at least a one million dollar policy, today however they usually require a three million dollar policy. This form of insurance will compensate you should a contractor break something such as an antique vase. It will also compensate you for all your expenses if for example a nail pierces a hidden wire and causes your house to burn down.  Liability insurance will also pay for medical bills and lost wages to people who are not connected the contractor should they get hurt on the job site, such as your friend should they trip over some tools and break an ankle while your showing off the project to them.

Workers Compensation Insurance

Everyone is familiar with what this insurance is for, it pays the medical bills and lost wages if an employee is injured. Workers compensation is usually more expensive then general liability insurance. Workers compensation insurance is purchased in units of ten thousand dollars of payroll and the cost of each ten thousand dollar unit is based on how risky the job is. A roofer pays way more for his insurance then does a painter. Workers compensation insurance is where most of the deceitful practices are found.

Bonded, whats that all about?

Not all contractors need to be bonded. There are two reasons that a contractor must be bonded. All contractors who work on public/government property must be bonded. Contractors who do projects costing more then one hundred thousand dollars are also required to be bonded.

When might a homeowner want their contractor to be bonded?

You as a customer may wish to have a bonded contractor even though they are not required to be bonded. The two major reasons for wanting a bonded contractor are for theft reasons or when the work you are hiring them for is time sensitive.

Theft example: Lets say you have lots of small valuable items such as baseball cards or jewelery and you are concerned someone may walk off with a piece, then you want a bonded contractor. Another example would be if you have a lot of protected customer information, having a bonded contractor would protect you against the liabilities of someone walking off with a disc full of information.

Time sensitivity example: Lets say you have hired a contractor to build you a new house and the total cost will be $98,000.00, the contractor does not need to be bonded according to law. However lets say the contractor tells you it will take three months to complete and you are selling your current house with the closing scheduled to take place in fourteen weeks. What happens if the contractor does not finish your new house on time? You may have to choose whether to let the buyer of your house walk away from the deal or you put everything in storage and move into a hotel or rent another house till the contractor finishes your new house. The bond insurance will compensate the financial loss you suffer because the contractor failed to meet his contracted time deadline.

Large projects are another reason to use a bonded contractor. Lets say your remodel work is going to cost $80,000.00 and the contractor dies or goes bankrupt or for whatever reason can not complete the work. The insurance company who bonded the original contractor will now pay someone else to complete the work.

There are several ways unscrupulous contractors put home owners at financial risk.

1) Lying about having insurance when they don’t: One clever way they do this is by buying insurance on a payment plan, get a copy of their insurance certificates, then stop paying for the insurance and let it get canceled. Homeowners who ask about insurance are then shown the original certificates. When someone wants proof of insurance the contractor is suppose to call their insurance company and the insurance company sends the insurance certificates directly to the homeowner. So after the contractor say’s, yes I have insurance, you should then tell them to have their insurance company send you the certificates.

2) The half truth:  The contractor says they are insured but they only have liability insurance. People frequently do not realize they should receive two insurance certificates, one for liability and another for the workers compensation policy.

3) I / we are not required to carry workers compensation insurance. Let me start off by saying that if a contractor is a one person company they do not need workers compensation, however the minute someone else shows up to help them, someone becomes an employee. In an effort to avoid the expensive workers compensation what some people do is this; both Joe and Sara set up their own business, buy their own liability policy and then try to tell people that since they are independent companies who work together they do not need to carry compensation insurance. This works fine as long as no one gets hurt, but if someone falls and hits their head and ends up with brain damage, you can bet their spouse will be looking to sue everyone, including you, to find money to help support her and the kids.

This is a very complicated area full of technicalities and even big companies with lots of high paid lawyers get it wrong as in the 2015 ruling against Fedex. A suit was brought against them in California by their drivers and Fedex lost. Fedex tried to say that technically their drivers were independent contractors but the courts disagreed.

The general rule of thumb is if their is more then one individual working on the same phase of work then someone needs Workers compensation insurance. Phases of work being distinct tasks such plastering, tile work, plumbing, carpentry or roofing.