Understanding Those Contractor Claims to Fame

You’ve seen it in Yellow Page ads and on the side of work vans. As an individual, what does a “licensed, bonded, and insured” contractor mean to you?

Licensed

Doing business with a licensed contractor is prudent for several reasons. First, the license proves that the contractor must have exhibited a degree of competence through testing, training and/or experience.

Further, a license gives you recourse if the contractor fails to adequately complete the job or meet expectations. The reason is that an oversight or governing body, typically a government agency or licensing bureau, approved the contractor for licensure and controls the license. 

You can file a formal complaint to that agency or bureau—and, depending on the severity of the situation—the contractor’s license could be questioned, suspended or revoked. Avoiding such complaints is imperative for contractors due to the fact that licensing is a prerequisite to work for many builders, government agencies and commercial customers.

The license also links the contractor to a database that is managed by the agency or bureau that you can use to review information about the contractor’s work history. You can access the database to review details of any complaints that have been filed by others.

Finally, a license also may link the contractor to codes, statutes or other rules put in place by a governing body that instill harsh penalties on the contractor should they be violated.

Bonded

Contractors typically obtain specific bonds for specific jobs. It is rare that an individual homeowner, for example, would require a contractor to obtain some type of bond as a prerequisite to performing a job. Bonding is typically required by builders, government and commercial entities. This is why a contractor who tells you that the firm is “bonded” likely means it is “bondable” (unless you are obtaining bids on behalf of one of the entities mentioned above.)

Even though the contractor may not obtain bonds to perform work for you as an individual, you should view a “bonded” or “bondable” contractor as a superior alternative. The reason is that companies that issue bonds require the contractor to go through a vigorous underwriting process that includes data concerning professional credentials, personnel, financial statements and ethics. 

A contractor that is bondable should be considered on the principle that if the firm is capable of winning the approval of a bond underwriter it will perform to a high standard.

Insured General Liability

Builders, government and commercial entities typically require that a contractor show proof of general liability insurance before it is hired to do a job. Unfortunately, many individuals do not show the same diligence.

Using a contractor that lacks liability insurance could be an expensive mistake.

Here’s a scenario: A small leak in your bathroom needs repair. You call a plumber—he’s a friend of a friend—to perform the job. He tears out drywall to get to the source of the leak. He tells you it’s fixed, puts everything back together and you pay him a few hundred bucks.

A few days later the leak is back with vengeance, flowing out of the bathroom and damaging carpet and furniture. Turns out the plumber fixed the leak with a broken pipe. This time repairs are estimated to be thousands of dollars. The plumber says he will replace the pipe but that he doesn’t have the money to pay you for all the damage to your property. You consider a lawsuit but realize that could take months and if he’s broke then you won’t get much anyway.

Now you’re forced to consider two options: eat the expense out of pocket or file a claim with your homeowner’s carrier. While some home insurance companies may pay the claim, others may not. If the claim is covered you are responsible for paying the deductible and the cost of your home insurance may increase.

The outcome could have been different if the plumber had liability insurance. This scenario is an example of negligence that would likely be covered by the plumber’s general liability insurance policy. The plumber could have filed the claim and you could have been compensated or reimbursed by his insurance company for the cost of the damage.

Further, if you chose to file a claim with your home insurance company and they agree to pay, your insurance company may seek reimbursement for dollars paid from the plumber and/or his liability insurance company. If successful, your home insurance company may refund your deductible.

Workers Compensation

Builders, government and commercial entities typically require that a contractor show proof of workers compensation or filed exemption before it is hired to do a job. Unfortunately, many individuals do not show the same diligence. If you hire a contractor to work at your house and he is injured, can you be responsible for paying his workers compensation benefits? In many states the shocking answer is yes. 

For this reason, make sure anyone performing work on your premises is insured for workers compensation. Ask for a certificate of insurance that proves insurance is in effect while the job is being performed. This simple step could potentially save you thousands in medical, disability and other costs normally paid by a workers compensation provider.

Conclusion

Hiring a contractor to perform a job for you is expensive enough. Why take a chance at drastically increasing the cost by using contractors that aren’t adequately insured? For more information on the insurance credentials you should be looking out for, call your independent insurance agent today.