One of the best ways to learn in this business is to establish a relationship with a real estate investing mentor and glean insight from both their successes and their missteps. A couple of years ago, I saw another real estate investor almost lose everything because of a decision to save a few bucks and hire an uninsured contractor to rehab one of his properties.
One of the workers got seriously injured on the property during the project. And, while he didn’t want to sue, that didn’t stop the hospitals and doctors’ offices from tracking the investor down for money. His homeowner’s policy was useless. Now, he knows to only hire contractors with general liability and worker’s compensation insurance, and he always emphasizes this now in his conversations with new investors. Here are some of the basics to keep in mind as you seek contractors for your investment properties.
The Basics of Liability Coverage
The minimum general liability coverage required for contractors varies from state to state and sometimes even city to city. So, you’ll want to understand what the law requires in your area as well as whether you’re exposed to any additional risks on your residential property investment. Broadly speaking, general liability policies cover two hazards that are specific to contract construction work:
Property damage. Nevermind that your contractor has a stellar reputation and hires only experienced crew members, accidents do happen—even during small renovations or property maintenance projects. It could be something as simple as a crack in the floor tiles while removing large appliances or it could be an even more costly incident like installing faulty wiring that sets fire to your house. Nobody’s pocketbook is deep enough to want to absorb that kind of cost. But if your contractor is insured with a property damage policy, you won’t have to. Remember, you still need property insurance to cover the property—the contractor’s policy generally covers damage by the contractor’s crews, but not other hazards and property damage.
Bodily injury/ accidents. Let’s say the contractor and his crew are busy working on your project and they’ve left some tools around in the driveway. Then, perhaps the mailman comes by with a delivery. He trips on the cord of a jackhammer and goes down, head over heels, and breaks his arm. Who’s responsible? Well, if the contractor doesn’t have coverage for bodily injury and accidents, you are.
Liability coverage, however, does not cover bodily injury or accidents that happen to the contractor’s workers—and, that’s why you need to make sure the contractor also has worker’s compensation coverage. It is usually mandated to some extent by every state, but some contractors try to skimp on it anyway.
This kind of policy will cover an injured worker’s medical expenses and a portion of their missed wages. In addition, if the worker sues over an injury not covered by the policy, the contractor’s legal fees will be paid by the insurance. However, if the contractor does not have workers’ compensation coverage, you will be left holding the bag. And, like in my colleague’s case, your homeowner’s insurance will not come to your aid—and neither will most real estate investors’ insurance policies.
Other Considerations to Keep In Mind When Hiring a Contractor
Now that you know what kind of insurance your contractor should be carrying, I want to tell you the most important piece. Do not just take the contractor’s word for it when they say they are covered! Sure, most contractors will be honest with you. But, since there are so many different ways that liability and worker’s compensation policies can be structured, you want to make sure that your contractor has at least the state-mandated minimum coverage.
In addition, your particular renovation project may carry unique risks that you will want covered. You will need to spend a little time thinking through the potential issues that could arise with every project you are completing on a house, and plan the protection of your investment property accordingly. Finally, and this cannot be overstated, be sure to have the contractor show you a copy of their policy.
Since that accident happened to my colleague, he’s learned how to cover his assets better and always encourages me to do the same. Having someone help me better understand the ins and outs of insurance has been invaluable, and independently owned and operated HomeVestors® franchisees benefit from a similar exchange of knowledge. HomeVestors®’ proprietary software, ValueChek™, helps franchisees value distressed properties, estimate the repairs needed, and make a good deal for both the homeowner and their business. We also have devoted Development Agents for every franchisee to rely on for advice and guidance throughout the property rehabilitation process. With this kind of support, our franchisees can avoid falling into traps like hiring an uninsured contractor and can simply concentrate on the work at hand.
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