Home Improvement Contractor Insurance Basics

Carpenter building a house
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"Make sure that your home improvement contractor is properly insured."  True or not?

Along with "get three estimates" and "check to see if he/she is licensed," it is one of those well-meaning recommendations that gets trotted out in articles about home remodeling.  While true, it is a recommendation that carries far less power than one might expect.  

Here is the reality behind the insurance and bonds carried by your contractor:

There Is Really No Such Thing as "Contractor Insurance"

Contractor insurance is a misnomer.  However, you can bundle several types of insurance and bonds and conceivably call it contractor insurance.  

Plus, there is no single requirement for this so-called contractor insurance. Home remodeling contractors are licensed or registered by state or even by county.  There is no U.S. federal regulation of home contractors.

Three Types of Insurance They Should Carry

According to the Federal Trade Commission, your home improvement contractor should carry:

  • Workman's compensation
  • Liability insurance
  • Property damage coverage

In addition, a surety bond is another type of "insurance" that protects the homeowner.

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.

Surety Bonds Should Not Be Confused With Insurance

It is understandable that homeowners may think that surety bonds are insurance for two reasons:

  1. Contractors obtain surety bonds from insurance companies.
  2. From the viewpoint of the homeowner, the surety bond operates much like insurance. It helps "insure" them against certain conditions. If the contractor fails to meet conditions of the bond, the consumer may file a claim against the bond.

Homeowners Will Be Surprised At How Small These Surety Bonds Are

If you imagine that your contractor's surety bond is worth $300,000, protecting you in case he completely destroys your home, you are wrong.

 Most amounts are low.

Required amounts vary by state.  A few examples:

  • California:  $12,500
  • Oregon:  $20,000
  • Arizona:  $5,000

Also, these amounts vary according to the contractor's projected gross income. Not only that, but specialty remodeling contractors (vs. general contractors) typically hold bonds of lesser amounts.

On Top of That, Surety Bonds Are Per Contractor, Not Per Job

Does that mean that in California, for example, a homeowner can file a $12,500 claim against a contractor?

No, not necessarily. These bond amounts are per contractor, not per job. So, the $12,500 may be shared among other jobs.

Many Parties May Lay Claim To That Bond

The surety bond is not there just for the homeowner. In some cases, this 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.  Translated, this means that you should not expect to recover much from a home improvement contractor's bond.

You Cannot Lay Claim To Your Contractor's Bond For Every Little Thing

Surety bonds are not there for every problem between homeowners and contractors.

There are two main areas that are covered.

  1. Damage.  Consumers whose personal family residence that is damaged as a result of a violation of the licensing requirements can file against the bonds.
  2. Fraud.  As California states, consumers who are "damaged as a result of a willful and deliberate violation [of licensing requirements] or by license fraud" can file.

Fraud is one area that state licensing boards are especially interested in preventing. As far as "damage" goes, that is a vague area that often can only be determined in a court of law.

After all, what is "damage"? Your addition was finished one month late and you are raging mad about it? Is that damage? Or, it was finished one month late, and you were unable to set up your anticipated home business and lost $5,000 in projected revenues. Is that a more plausible type of damage?  These are matters more for seeking recompense in a civil court via lawsuits than from filing against bonds.

This Is How You 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.

In any case, that is another reason why bonds are not truly "contractors insurance": the contractor is required to pay the money back to the insurance company.