Checking on home improvement contractor insurance before signing any contracts for work is common advice. But what exactly is this insurance and how can it help you?
What Is Home Improvement Contractor Insurance?
Contractor insurance is a loose term or a nickname for a bundle of several types of insurance and bonds that a contractor may carry or is required to carry in order to become and remain licensed with local authorities.
In addition, there is no single requirement for this home improvement contractor insurance. Home remodeling contractors are licensed or registered by states, counties, parishes, provinces, and even by cities. Currently, there is no U.S. federal regulation of home improvement contractors.
Types of Insurance Contractors May Carry
The Federal Trade Commission advises that your home improvement contractor should carry at least three types of insurance: workman's compensation, personal liability insurance, and property damage coverage. Prior to signing a contract with a contractor, you should be able to view these policies. Contractors often have copies of the policies in binders that they allow prospective clients to view in preliminary discussions. All insurance should be current.
Workman's compensation provides for minimal wage replacement and medical expenses for workers injured on the job.
Personal Liability Insurance
Personal liability insurance, often part of a general liability insurance package, covers the contractor against injury to people.
Property Damage Coverage
Property damage coverage, also often found bundled in a general liability insurance package, covers the contractor against damage to the property during the course of the work.
In addition, a surety bond is another type of financial compensation instrument that may protect the homeowner against damage or non-completion of the work.
Contractor Surety Bonds Basics
Licensing authorities typically require contractors to hold surety bonds as a condition of licensure. While surety bonds are not insurance, homeowners may confuse them with insurance for at least a couple of reasons.
First, contractors obtain surety bonds from insurance companies. Second, at least from the viewpoint of the homeowner, the surety bond operates much like insurance. The surety bond may help ensure the homeowner against certain conditions. If the contractor fails to meet the conditions of the bond, the consumer may file a claim against the bond.
Surety Bond Amounts
Homeowners might be surprised at how small these surety bonds actually are. If you imagine that your contractor's surety bond is worth $300,000, protecting you in case he or she completely destroys your home, you are wrong. Surety bond amounts tend to be quite low. Examples include:
- California: $12,500
- Oregon: $20,000
- Arizona: $5,000
These amounts vary according to the contractor's projected gross income. Not only that but specialty remodeling contractors, as opposed to general contractors, typically hold bonds of lesser amounts.
Surety Bonds Are Per Contractor, Not Per Job
Bond amounts are per contractor, not per job. So, using the example of a $12,500 surety bond, this may be shared among other jobs. If other homeowners are filing against that claim, your slice of the pie might be reduced.
Other Parties May Claim the Bond
The surety bond is not there just for the homeowners. In some cases, this financial instrument can also be used by the contractor's suppliers or employees. The already-small bond amount is getting chopped up into smaller and smaller slices.
Surety Bond Claims Are Limited
Surety bonds are not there for every problem between homeowners and contractors. There are two main areas that are covered: damage and fraud.
Consumers whose personal family residence is damaged as a result of a violation of the licensing requirements can file against the bonds.
As far as damage goes, that is a vague area that often can only be determined in a court of law. After all, the definition of damage varies from person to person. Is your issue that your addition was finished one month late and you are upset about it, or that it was finished one month late and you were unable to set up your anticipated home business and lost $5,000 in projected revenues?
These are matters more for seeking recompense in a civil court with lawsuits than from filing against bonds.
When the contractor commits fraud against the homeowner, the homeowner may lay claim. This fraud must be a violation of licensing requirements. Fraud is one area that state licensing boards are especially interested in preventing.
How to Make a Claim on a Contractor's Bond
If the contractor has failed to make good, then go to the state contractor licensing board and the surety bond company. The boards regulate bonding and should have information on hand as to which insurance company you should contact.
After that point, you should no longer have to deal with the contractor. The insurance company will be the go-between. The insurer may have to take the contractor to small claims court to recover money paid out from the surety bond.