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Insurance and Bonding for Contractors

Choosing the right home improvement contractor can make or break your remodeling project. It is common for many homeowners to check references and ask friends for suggestions about potential contractors but it is surprising how often homeowners neglect to check the insurance status of contractors and subcontractors they use.

When you consider how much is at stake and all the risks that every large or small home improvement project can pose, the quality of the contractor’s insurance policy must be a prime consideration in the selection process. And, the chances are good that the insurance needs to be closely studied, because in today’s construction and remodeling industries, subcontracting is the name of the game. And, it is entirely possible that the contractor’s insurance does not cover the subcontractors.

Most contractors will sub out parts of the remodeling project, such as electrical, plumbing, heating and more. The homeowner must be diligent and obtain insurance certificates for every person or subcontractor on the job. It only takes one uninsured worker to have an accident to cause the homeowner unnecessary financial damage and loss.

Remodeling Contractor Insurance Basics

One of the biggest misconceptions is that there is something called “Contractor Insurance.” This is not true. Furthermore, there is no single, uniform insurance requirement for suitable remodeling coverage. The homeowner must first make sure the contractor and subcontractors are licensed. There are multiple risks associated with using unlicensed contractors, including violation of local codes and ordinances.

The Federal Trade Commission says that every home improvement contractor and subcontractor should carry three basic types of insurance coverage:

• Workman’s Compensation Insurance

• Liability Insurance

• Property Damage Insurance

Many states also require the contractor and subcontractor to provide Disability Insurance. However, if your remodeling contractors and subcontractors are uninsured, you could be unknowingly at risk if an accident occurs or if a worker is hurt on the job. This exposure is simply not worth it.

Another type insurance coverage that protects the homeowner is the surety bond. Contractors can procure surety bonds from insurance companies. Surety bonds insure the homeowner against certain conditions when the contractor fails to meet the terms of the bond. When this occurs. The homeowner can file a claim against the bond.

But, before you leap, surety bond requirements vary between states and there are no windfalls here. In Arizona, surety bonds can be for $5,000. In Oregon, the amount could be $20,000. And, the bond amount might have to be shared with other jobs gone bad. You could have much to lose, which makes it imperative that you choose a responsible, proven contractor who is insured and who will stand behind the work.

Surety bonds are more complicated than good insurance. Basically, the homeowner can file a claim if there is provable damage or if there is fraud, such as license fraud. For most remodeling projects, you are better off choosing the right, insured contractor than worrying about winning a surety bond claim.

Certificates of Insurance

Most experienced contractors carry certificates of insurance in their briefcase and always provide copies with the executed contract. Homeowners can ask to be named as additional insureds. The advantage of this is that if there is an insurance lapse, the homeowner would be immediately advised.

If homeowners are not familiar with insurance, take the contractor certificates and the subcontractor’s certificates of insurance to a consultant and get an opinion. As exciting as your project may be, there are few things that can ruin a remodeling job more than an accident where a worker, contractor or subcontractor is uninsured. Let’s prevent that nightmare scenario before we begin the project by verifying sufficient coverage for everyone on the job.