If you’ve decided to upgrade your home with an improvement like a new roof, kitchen remodel, or swimming pool, the most crucial step in the process is picking a qualified contractor for the job. But before finalizing your choice, be sure to avoid the mistake that so many homeowners make: Overlooking the importance of a contractor’s insurance policies.
An injury that occurs on your property during construction—like a fall from a ladder—or a major workmanship failure after job completion—like a roof collapse or flooding from faulty plumbing—could cost you thousands of dollars and many hours of stress if your contractor is not properly insured.
Don’t count on your homeowner’s insurance policy to pay the bills or legal fees!
Many people assume that a homeowner’s insurance policy provides adequate coverage for any damage or liability that arises during a home improvement project or after it is finished, but this is rarely the case.
When insurance does provide coverage, the levels may be minimal. Or, the coverage may take effect only if certain provisions for contractors were in place. For instance, with some policies, coverage is available only if the homeowner purchased a rider from their insurance company before the project started.
1. Are you fully insured: What kind of coverage do you have?
Types of insurance vary, and they are not always comprehensive. For example, your contractor’s policies might cover acts like theft, vandalism, and damage to the tools being used on the job. However, the coverage may not extend to liability for your personal possessions.
You want your contractor to be insured not only for their protection, but for yours: This includes you, your home, and the surrounding property—like your neighbors’ home and yard.
There are several types—or lines—of insurance that are crucial for covering potential risks. For contractors, being “fully insured” means carrying lines for four key areas to cover loss, damage, or liability that could impact their clients:
Workers compensation: Covers medical expenses needed to diagnose and treat injuries that employees sustain in the workplace, as well as disability payments and sometime rehabilitation, retraining and other benefits.
Property (part of the general liability): Covers damage to your home, yard, and possessions, as well as to your immediate neighbors’ homes, yards, and possessions.
Ideally, your contractor will be insured across all four lines. At the very least, their insurance should cover:
- Worker’s compensation for injuries contractors and employees may incur on the job;
- Accidents involving the contractor’s equipment.
Coverage in each area is essential to provide protection in scenarios that you may have never imagined could affect you.
For instance, consider the following situation: Your contractor’s employee is driving to your house to work and hits another driver. The victim’s lawyer can drag you—the homeowner—into a lawsuit. If your contractor does not have adequate auto insurance for their company vehicles and the employees who drive them, you could wind up in messy litigation—despite having nothing to do with the accident!
2. Exactly how much are you insured for?
Just like your car and health insurance, the dollar amount for coverage under each contractor’s insurance policy can vary.
For general liability—which includes property damage—your goal is to hire a contractor with a policy that provides at least $1 million per incident/$2 million in aggregate. These amounts are the common standard for liability in the home improvement industry.
For workers comp, each state sets the minimum requirement. Therefore, as long as your contractor has a workers comp policy in place, the dollar amount will meet the mandated minimum.
When it comes to the levels for auto insurance, state-required minimum are often low. Even though the legal minimum might be—say $300,000—in their state, it is good practice for contractors to purchase higher coverage levels. Often, $1 million is more appropriate.
3. Are each of your insurance policies current—and when do they expire?
Expired policies are no good to you! Not only must your contractor’s coverage must be current, the policy period needs to cover the anticipated timeframe of your project’s completion. Does your contractor’s policy end in two months—in the middle of a projected working timeline?
Do your homework. Make sure that the coverage period will be in place while your project is under construction. When considering your expected completion date, be sure to account for any potential delays in construction; timelines can and do get interrupted for a variety of reasons. Bad weather, city permitting holdups, and changes in original design can slow progress on any job.
4. Where’s the proof?
Don’t take your contractor’s word on their insurance: Get confirmation! You’ll need hard evidence in hand to make sure your contractor’s policy protects you.
Ask for “proof of insurance”. This is an official one-page document that lists the type of coverage, dollar amounts, effective dates of the policy, and name and contact information of the insurance carrier. File these documents in a safe place.
Because your contractor will have three lines of insurance, you may receive up to three different documents: Property coverage is always part of a general liability policy, which is one line. Another line could be workers comp, and it may be issued from the same insurance company as the general liability policy, or from another company. The same concept applies to auto.
If all three lines are from the same carrier, all will be listed on a single document. There’s no need for concern if the coverage for each line is from one, two, or three carriers. What matters is that each of the three lines is in place, current, and meets minimum coverage requirements.
Apart from asking for a proof of insurance in order to verify the coverage, it’s a good idea to save the document(s) for future use. For example, if you had a contractor build a rock wall, and six months later it collapses and injures someone, you want to be able to turn to your contractor’s insurance for coverage and have the relevant policy handy.
Reputable contractors should be ready and willing to provide proof of comprehensive insurance coverage. If your candidate is balking at your questions, consider another professional for your job.
5. Can you add me to your policy?
The best-case scenario for you as a homeowner is to have your contractor add you to each of their policies. The way they do this is by making you an additional, named insured.
Being named on your contractor’s policy provides several benefits. One is that it prevents the contractor from switching or changing the policy without your knowledge. Or, if the contractor fails to pay premiums and the policy gets cancelled, the insurance carrier will automatically notify you 30 days before the policy lapses.
In addition, when you are a named insured, the insurance carrier will automatically mail you a “certificate of coverage”. This document will show you as a named insured. It will also serve as proof of coverage—negating your need to ask for this as described in section #4 above.
The greatest value in being named as an additional insured is extra protection: It binds the insurance carrier to extend to you the same coverage that the contractor would receive for a covered claim.
This approach can save you legal hassles in some circumstances. Say your contractor goes out of business: If a claim arises that the insurance carrier would have been obligated to cover for the contractor, and that claim is made against you, the carrier will have to cover you—as a named insured on the policy—just like they would for the contractor.
When hiring a contractor for your next home improvement job, always make sure to minimize risk: Watch your back, and mind your wallet by double checking that your contractor has full insurance coverage in all key areas.