Verify a contractor's insurance to prevent unexpected costs
Whether you're embarking on something as small as replacing cabinets or as large as building an addition, there's a good chance you're putting your most valuable asset in the hands of someone you don't know.
Luckily, there's a simple way to reduce the likelihood that a mistake or oversight on the part of your contractor will lead to serious financial loss for you: Verify his or her insurance coverage.
Inquire before you hire
Never assume that a contractor has business insurance. As you shop around, ask about each prospect's insurance coverage. Contractors can prove that they're covered by showing you a Certificate of Liability Insurance, but be forewarned: A certificate does not equal coverage.
Once you've seen the certificate, it's up to you to verify that the contractor's policy has not expired, which you can do by calling the agent listed on the certificate. An expired insurance policy is the same thing as no coverage at all.
Bottom line: If your contractor has insurance, mistakes that cause damage to your home are a headache. If your contractor is without insurance, those mistakes become a nightmare of repair costs, property damage and more. Always verify insurance before signing a contract.
Do not rely on your homeowner's insurance
Your homeowner's insurance policy will not cover damage caused by a contractor. Why? You invited that contractor into your house, so the insurance company classifies the damage as intentional.
There is one caveat here: You can update your homeowner's policy prior to starting a renovation project to protect yourself against certain risks the project presents.
Bottom line: Homeowner's insurance will most likely not cover damage done by a contractor working on your house. If you're having renovations done, be sure that your contractor carries his or her own insurance.
Do not assume a single insurance policy protects against all risks
Just as flood insurance policies are typically separate from standard homeowner's insurance policies, the types of insurance contractors carry vary significantly and protect against a variety of risks. When checking potential contractors' insurance coverage, look for the following policies.
- General liability insurance (GLI): General liability insurance covers risks such as bodily injury and property damage caused by the insured party.
Since contractors' "products" are indistinguishable from their "work," GLI for contractors is unique. For example, there is no difference insurance-wise between the physical roof and the work being done to the roof. In addition to offering standard protections, GLI for contractors acts like professional liability (errors and omissions) coverage, offering protection against allegations of faulty workmanship.
- License bond (a.k.a. permit bond): License bonds are a kind of insurance specific to those in the building trades. Many states require contractors to have these bonds in order to become licensed to work.
Licensed and bonded contractors enjoy a guarantee from an insurance company that, if any of the contractor's work is not up to state code, does not meet safety regulations or proves faulty, the insurance company will pay related damages. In order to obtain a permit bond, a contractor must demonstrate to an insurance provider that he or she follows certain safety practices and protocol.
- Inland marine insurance: This type of property coverage offers protection for business assets that aren't kept in a fixed location — for contractors, this usually means work tools and other gear they haul from one location to another. Contractors typically carry special classes of inland marine insurance called contractor's equipment and builder's risk, which offer protection specific to their work equipment.
Bottom line: Knowing a contractor "has insurance" is not enough. Homeowners should verify that anyone they hire has adequate protection for the work they plan to do and the things that might go wrong.