Is it really that important to hire contractors that are insured?

John CasmonPro Member

Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes

6y

I'll go a step further and say make sure they are BONDED. Especially if it's a big project. The difference between simply being insured and bonded is crucial as you can get compensated through the bond if anything happens or a contractor steals your money. Insurance has limitations and is harder to prove guilt on the contractor.

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Jonathan GreeneBusiness Member

Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes

6y

When you ask questions like this, you have to ask yourself why you are asking. If you are trying to trim costs (really the only excuse other than no licensed and bonded contractors being available right when you want), this is not the way to do it because you open yourself up to much more liability. Why wouldn't you want the person doing the work to be covered on your behalf for the million scenarios that could come up with a renovation or house work?

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Jon KellyPro Member

Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes

6y

@Rob C. I've thought the same thing. A few comments might be helpful:

1. In my opinion, it's not necessary for smaller, "low risk", jobs. But, you would want a contractor insured for larger, "high-risk" jobs.

2. Some jurisdictions require the contractor be insured. I'm currently completing a building permit and the Borough/County requires a minimum insurance coverage on the contractor

3. In my experience (I understand this doesn't apply to all contractors), insured contractors are more expensive but also more professional than contractors w/o insurance. You can cut costs with a low budget contractor, but you get what you pay for

5 Reply

Paul Welden

Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes

6y

I'm located in Arizona, and my rule of thumb is if the cost is $1000 or less and the project has a low risk, i'm okay hiring an unlicensed contractor/handyman. But I only give money upfront to a contractor/handyman who has an active bond that I verify.

1 Reply

Pamela Sandberg

Realtor / Attorney · Phoenix, AZ · Member since 2018 · 388 posts · 265 votes

6y

Their insurance isn't just for premises liability. It also covers damage that they do to your property (which is arguably more likely if the contractor doesn't have insurance).

2 Reply

Account Closed

Rental Property Investor · Mechanicsburg, PA · Member since 2018 · 281 posts · 176 votes

6y

@John Casmon thanks for adding this distinction. I never really was sure the difference between the two before. Thanks!

John CasmonPro Member

Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes

6y

Originally posted by @Account Closed:

@John Casmon thanks for adding this distinction. I never really was sure the difference between the two before. Thanks!

Absolutely. Not that important on small jobs, but critical on a large project.

1 Reply

Rob C.

OP

Investor · CA · Member since 2012 · 170 posts · 28 votes

6y

Thanks for all the responses everyone. Really helpful feedback. I think I agree now with the sentiment that it’s better to use insured contractors on high risk jobs, and okay to use uninsured for low risk jobs. When I think of high risk I think of electrical, roofing or anything else involving heights (e.g. gutter cleaning on a two story home). Anyone else have opinions on what else ought to be included in the high risk category?

@Pamela Sandberg, Thanks for raising that subtopic. My understanding is that homeowner’s insurance will typically cover *most* damages by contractors. This article summarizes my understanding: https://www.allstate.com/tr/home-insurance/contractor-damaged-home.aspx. And although it may or may not be fruitful, I suppose you could also bring a lawsuit against the contractor as a backup option if insurance doesn’t payout. Please correct me if I’m mistaken.

Pamela Sandberg

Realtor / Attorney · Phoenix, AZ · Member since 2018 · 388 posts · 265 votes

6y

This article discusses a LOT of important exclusions. There are many types of damage (or damage resulting from poor workmanship) that would NOT be covered by homeowner's insurance. It's a risky bet to rely on homeowner's insurance to cover a contractor's mistake. And even if it did, you would be stuck with higher premiums for something your contractor did.

Rob C.

OP

Investor · CA · Member since 2012 · 170 posts · 28 votes

6y

@Pamela Sandberg, thanks for the reply. When you say the article discusses important exclusions, are you referring to the checkmarked items (accident coverage, poor workmanship, resulting damage, coverage limits)? As far as I can tell those checkmark items aren’t intended as a list of exclusions. I do agree with you that poor workmanship is an exclusion. To what extent though? For example, if a plumber does a sloppy job repairing a pipe and it bursts because of poor workmanship, it seems clear that my homeowner’s insurance won’t cover the cost to re-repair the pipe, but that’s a risk I’m willing to take as long as it covers the ensuing water damage more importantly. The relevant language in the sample policy linked in the article is hard for me to wrap my head around (and it happens to be the same language in my policy). However, the article sums it up that the resulting damage (e.g. water damage) ought to be covered. I do tend to work with handymen that warrant their work so I would likely ask them to repair the pipe at no cost, but even if I have to come out of pocket to have it fixed again the right way that seems a risk worth taking (especially if we’re talking about smaller jobs). All told, I’m not seeing why it’s a risky bet to rely on homeowner’s insurance to cover contractor damages. I’d be glad to be informed on what I may be missing though. thanks again for sharing your perspective.

2 Reply

Rick Pozos

Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes

6y

I think your last post is the whole point, you dont really know what your insurance covers!!!

You mentioned if they do something wrong, you will have them come out and fix it for no charge. Good luck with that. Most people who do little jobs want to make their $50 or $100 and be done with you. They are not going to come back and replace parts and spend time again at your place and for no more money.

There is just a higher level of quality and workmanship when people know that they have insurance and pay for it themselves.

As mentioned above, I would use someone not licensed to put up some cabinets, carpentry or maybe paint. Something like plumbing, electrical, or a/c they must be licensed. Exception: to change out a faucet, something that I can check and know right then and there that it is done right(no leaks).

Matt Nico

Member since 2019 · 448 posts · 306 votes

6y

Originally posted by @Rob C.:

From what I've read in the forums it seems that conventional wisdom here is it's best to hire only contractors & handymen that are insured. I adopted this perspective when I started as a landlord as I tend to trust the biggerpockets community at large. Now though I'm starting to question that perspective. Many of the arguments for hiring insured contractors suggest that you'll want to place a claim on their insurance rather than yours when something happens (e.g. they get injured on your property). However, isn't that part of the reason I'm paying my insurance premiums- to protect me in an unexpected event? I understand not wanting to place a claim on your own insurance and risk higher premiums, but is it really worth paying extra for an insured handyman each time just to prevent that rare situation? It seems equivalent to paying for rental car insurance even though your auto insurance will offer coverage if you get in a collision. I'm interested to hear what others here think about this counter perspective. I'm still trying to make up my mind on this matter, and feedback always helps. For what it's worth, I'm thinking about all this with regard to miscellaneous maintenance & small jobs on a rental property rather than a full rehab. Although I'm not sure that should even make a difference- does it?

Rob, I would look at the contractor in terms of your big ticket items in your house. Things like a new roof, anything electricity, or an Air conditioner or water heater, you should probably go with someone who is insured. These are the bigger items with risk. I make sure contractors have a license and are insured.

For the smaller stuff, I am perfectly fine calling a mom and pop handyman to fix things. Do you really need insurance for someone to come over and replace a kitchen sink that's leaking? I'd say no.

Happy Housing,

-Matt

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

6y

@Rob Condy

I’m going to use my self as an example as to why you always want to hire someone with insurance, no matter how small the job.

About 12 or so years ago I was hired to hang drywall in a bathroom. Did the job, all was good. Until 1.5 years later when I got a call from the customer asking for my Insurance info. Apparently there was a water line fastened to a stud, right behind the Kraft faced insulation. Never saw it, didn’t know it was there. Drywall screw into the copper pipe, and it didn’t leak until 1.5 years later when the tip of the screw rusted off. $11,000 damage to the room below, Because of one single drywall screw. Didn’t cost me or my customer a dime.

Hire a guy with no insurance and good luck with that $11,000 claim...

4 Reply

John Mocker

Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes

6y

Rob, Everyone seems to be focused on the Contractors coverage for Liability which is important. I would say it is just as important to make sure they have Workers Compensation. When Joe Uninsured, your uncovered contractor falls off the ladder, the smart lawyer he hires will be saying that he was an employee at the time of loss not a subcontractor. If you are paying Joe hourly and there is no contract there is a chance you will be paying what Workers Comp would pay Joe (in CT that is approx. 60% of lost wages and all the medical bills). If you are going to use Contractors without Workers Comp. talk to your agent and attorney about how to structure it so it shows he was a sub (contracts, payment on a job basis, etc.).

2 Reply

Frank Hinck

Rental Property Investor · Minneapolis, MN · Member since 2020 · 540 posts · 285 votes

6y

@Rob Condy

100% yes absolutely, No question about it. Make sure they have General Liability and Workman’s Comp. i would make sure they send you a Cert of Insurance by email everytime, don’t just “keep it on file” because they expire and if he provides it but it’s expired then it’s insurance fraud and he’s at fault even worse. Regardless if there’s a claim you’ll still get listed on the suit but at least they’ll go after the contractor first.

Rob C.

OP

Investor · CA · Member since 2012 · 170 posts · 28 votes

6y

Thanks for the continued feedback everyone. @John Mocker, I’m particularly glad you weighed in as it’s good to have the perspective of a good insurance agent on this topic. Thanks for bringing up the worker’s comp topic. In the situation you described where a contractor doesn’t have worker’s comp and the landlord is sued would those medical bills and lost wages typically be covered by the liability insurance of the landlord’s policy? I’d also be grateful to hear what you think the chances are of the typical landlord insurance policy covering the $11k worth of damages @Matt M. described in his personal example above. I’m curious if that would be considered “resulting damage” and therefore be covered. Thanks for sharing that Matt. It’s helpful to hear real life examples that one typically wouldn’t think of.

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

6y

@Rob Condy

As a self employed contractor with no employees, I have no worker’s compensation and can’t get for myself.

Here’s a question for everyone- I have $2m in liability coverage that costs me $865/year. Would you really want to hire someone that can’t afford to get a policy? What kind of person are you hiring that isn’t responsible enough to get a policy.

It’s a no brainer, never hire someone without insurance, especially to save a buck. Just not worth it.

Paul Winka

Rental Property Investor · St Louis, MO · Member since 2010 · 317 posts · 72 votes

6y

Originally posted by @Matt M.:

@Rob Condy

As a self employed contractor with no employees, I have no worker’s compensation and can’t get for myself.

Here’s a question for everyone- I have $2m in liability coverage that costs me $865/year. Would you really want to hire someone that can’t afford to get a policy? What kind of person are you hiring that isn’t responsible enough to get a policy.

It’s a no brainer, never hire someone without insurance, especially to save a buck. Just not worth it.

Can you elaborate on that, Matt? Is it too expensive or are you just not insurable?

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

6y

@Paul Winka

In Pennsylvania, you can’t get worker’s compensation on yourself. I don’t know about other states.

1 Reply

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

6y

@Paul Winka

It may be different if you are a corporation, but I have no idea

Paul Winka

Rental Property Investor · St Louis, MO · Member since 2010 · 317 posts · 72 votes

6y

What happens if you get hurt on the job that is not negligence on the owner's part, what would you do?

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

6y

@Paul Winka

I’d be screwed. I believe there is disability insurance that’s available.

Paul Winka

Rental Property Investor · St Louis, MO · Member since 2010 · 317 posts · 72 votes

6y

That really sucks that there is not even the option to get the WC insurance for yourself. WC vs disability insurance...I thought those were the same things.

If you really got seriously hurt, your options would be the disability insurance or to sue the owner then?

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

6y

Workers comp is to protect employees. I realize people are sue happy, but if I cut off my fingers on a chop saw cutting trim for you, why would I make that your problem. If I don’t know how to properly use my tools, I shouldn’t be using them. Knock on wood, 17 years in business and nothing but 3 stitches In my finger from a utility knife.