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

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

Rob C.
Investor · CA · Member since 2012 · 170 posts · 28 votes

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?

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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

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  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    @Paul Winka

    My wife is an underwriter for a world wide insurance company, believe me I’d have it if I could..

    0Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    6y

    Hire an unlicensed contractor without insurance, one of the workers slips and falls on your roof, guess who the state (and worker) will go after?  The guy with deep pockets (ie you).

    Hire a licensed AND bonded contractor and make them prove it.  The bond is needed in case they stiff a sub who can put a mech lien on your property even if you paid the gen contractor.

    1Reply
  • Joe Cassandra
    Rental Property Investor · Woodstock, GA · Member since 2017 · 517 posts · 772 votes
    6y

    Glad this was all worked out as it's something that I feel guilty about as I didn't understand before. 

    For large projects, like roofs, or GC-ing, I've checked for insurance. 

    But stuff like I have to replace a fence post at a rental property, I'm admittedly not going to check an insurance/bond to a 90 min job. 

    Maybe some would say that's crazy...but if I see they have 5-star reviews, I'm going to take that risk. (would not hire some bloke that I find on CL that I can't verify any work etc.)

    0Reply
  • Joe Chirdon
    Real Estate Agent · Harrisburg, PA · Member since 2016 · 159 posts · 82 votes
    6y

    Big jobs - Yes, Little Jobs - not necessarily. 

    0Reply
  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    6y

    Personally, I don’t see this being a no brainer as @Matt M. describes it to be. We as investors typically have to expect some tradeoffs between speed, quality and cost when hiring contractors. The way I look at it this just introduces another tradeoff variable - risk. If an uninsured contractor is able to do a quality job at the best price I may be willing to accept the higher risk due to their lack of insurance. I think the biggest key in weighing the risk variable is whether your homeowner’s/landlord insurance policy will cover any resulting damage and liability for injuries. I feel confident that the typical policy will provide such coverage based on what I shared in earlier posts, but I'd be glad to be told why I’m misinformed. Also, to those that say you can't be sure your insurance will payout, why should I be confident that a contractor's insurance policy will? Please help me understand what I'm missing.

    Secondly, I really appreciated the back and forth between @Matt M. and @Paul Winka about the workman's comp insurance. I'm really surprised to hear that solo contractors can't get workman's comp. @Matt M., Is that unique to your state? That seems like it could put you at a disadvantage. It adds risk for homeowners/landlords hiring solo contractors versus staffed contractors with workman's comp. In fact, that may be a bigger priority than the liability insurance since the "slip and fall" type lawsuits are the ones folks here on biggerpockets seem to focus on. And I wonder if it takes on greater importance now in a world of covid-19 (e.g. what happens if a contractor gets coronavirus from a tenant?). I really respect that you're the type, Matt, that won't bring unreasonable lawsuits against others. Nevertheless, the liability risk is still there for landlords in that general situation since people are unfortunately sue happy as you said. And that risk ought to be weighed against all the other variables.

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  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    @Rob C.

    I'm not sure if it's only Pa with the worker's compensation. It has never put me at a disadvantage (17 years bin business) not having any because it's known I won't have any being solo. I've even worked for HUD doing 203k rehabs without workers comp. And if you're looking to take the risk and hire guys with no liability insurance, you wouldn't be looking for the staffed contractor with workers comp. I don't understand your comment about what if a contractor gets corona from a tenant... do people sue for that? Proof? That's ridiculous.

    I can’t remember the last time someone asked me for proof of any insurance wether it be an investor or a homeowner. Other than a PM company, it’s probably been 10 years. 

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  • Paul Winka
    Rental Property Investor · St Louis, MO · Member since 2010 · 317 posts · 72 votes
    6y

    Perhaps the "fell off the roof" contractor suing the owner is more anecdotal than a common occurrence. But would the typical landlord's insurance policy guard against this? I'd guess as the owner I have the duty to ensure I hire workers with insurance. If I didn't, I wouldn't be surprised to be denied coverage. I guess I have to get out my policy and read the fine print. 

    I agree with Rob though, there is a certain amount of risk to take on with hiring folks, and it might be worth it for the money saved. It must be worth for enough owners, I used to see a group of illegals congregating in the home depot waiting to be hired. 

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  • Rob C.
    OP
    Investor · CA · Member since 2012 · 170 posts · 28 votes
    6y

    @Matt M., I just posted a bit about covid-19 liability over in this house-hacking-liability-in-time-of-covid thread. Regarding your question of whether people sue for that, evidently a lot of Republicans in Congress think enough people are (or will) to emphasize removing businesses from such liability in the recently discussed legislation. As to whether people can prove it, I'd think that'd be pretty difficult. Even if they can't I still wouldn't want to deal with the headaches and attorney fees that go into fighting an unreasonable lawsuit. I'd hope insurance could take care of it for me. I did some research and it's not clear whether homeowner's insurance covers it. And it's not clear whether workman’s comp does. 

    I'm beginning to think that's par for the course in the world of insurance- You don't know what you're going to get without digging into the details of the policy document, and even then it can still be a bit ambiguous. At least I'm familiar enough with my insurance policy document to have somewhat of a sense of what is covered. Am I going to scan through every General Liability and/or Workman's Comp insurance policy for each contractor I hire to get a sense of the coverage? No thanks. It's enough of a hassle hounding a contractor just for a certificate of insurance. I'm not surprised that @Matt M. hasn't been asked for it in 10 years. I personally don't know any other investor that regularly asks and verifies. And it seems like every time I do, it catches the contractor by surprise and can even put off some to go dig through their files to find it. Yet it seems like such verification is standard protocol according to the BP forum. It's surprising to me that my personal experience seems to suggest otherwise. It makes me wonder if most people know it's the right thing to do but don't for whatever reason - a sort of "do as I say, not as I do" scenario. No idea.

    I'm starting to lean toward taking more chances on the uninsured contractors rather than pay more for insured contractors as it's hard to get a good idea of the benefit you're getting from their insurance. Again though, it all depends on the kind of question @Paul Winka just posted. Is the homeowner's/landlord insurance going to provide sufficient coverage in the absence of contractor's insurance? I've shared my thoughts on that matter, but hope some insurance brokers or experts might weigh in with their wisdom since I'm admittedly no expert - just a guy that likes to research in order to try and get to the bottom of things.

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  • Matt Groth
    Contractor · Grand Marais, MN · Member since 2016 · 249 posts · 417 votes
    6y
    Same here. Imo, there is no such thing as an "unlicensed contractor ". A contractor is a professional that has insurance. Otherwise, you are hiring what's known as a "dude with a hammer". I can't tell you how many projects I have worked on as the second guy on the job. My rate is double, but I am FAR cheaper.


    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.

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  • John Mocker
    Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes
    6y
    Matt & Paul, Workers Comp. laws and rules are set on the State Level. In CT, a Contractor Can opt to include himself/herself. For many classification (carpentry, painting, drywall, etc.) the cost for the owner is so great that most opt out. One alternative that a contractor may get for themselves is a Disability policy. It provides income replacement in the event or an injury or illness. It normally includes both work and non-work injuries.
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