Blasting Uninsured vendors

18 Replies

As a landscape contractor most of my competitors are uninsured but I find homeowners seem to care more than landlords about insurance, why is that? This is a generalization to elicit feedback but my comment is based on experience. Please let me know if you have had this experience as a vendor and your thoughts. Perhaps as a landlord you can express your feelings as to why you lean one way or the other. Any horror stories of using uninsured vendors would be appreciated also. 

A lesson for all those new real estate investors like myself who aspire to get Bigger Pockets. 

I see it as that most home owners are a little more cautious when hiring contractors.  Its their own home, they have an emotional bond to it and they don't deal with these things as often, so they kinda have a list in their head of dos and don'ts.  A landlord on the other hand has no emotional bond so they tend to care more about the bottom dollar.  They also deal with contractors more often so they are not as anxious or nervous when hiring someone. 

Strange, my experience has been the opposite. Homeowners don't usually understand why they want someone insured while PMs/landlords understand the protection it affords them. 

That makes sense but as a newbie to investing I think the money to buy that investment property is just as important as the home i live in. I too hope i get to a point where the rental property is worth risking to save a buck,  literally. Thanks for the comment Dustin. 

We use a combination of both insured and uninsured vendors for our primary residence and for our rental properties. We've been using the services of contractors for 20+ years as owners and managers of our own residential rentals. It all points to understanding the job at hand, risk-benefit, return-on-investment and how much confidence we have in the person doing the work. We also maintain substantial insurance ourselves. We develop long-term relationships with our go-to vendors, some LBI and some not.

If a vendor is going to be on the roof or high on a ladder (roofing maintenance and repair, chimney sweeps, gutter companies, etc.), we will look for someone who is licensed, bonded and insured. If the vendor is going to be replacing key components of the electrical system, again only LBI. Same goes for HVAC contractors and appliance repair vendors.

Our plumber worked for one of the big plumbing companies in town for 20 years before going out on his own. He's not LBI, but is just as good as any of those who are and at half the price. Same with our landscaper.

If someone asks me for a recommendation, I'll give them the names of those vendors who are LBI. This is because although we can adequately assess our risk-benefit, I don't think everyone else can or does. 

Several years ago we regularly used the services of a handyman who was not LBI and we were pleased with his work. A neighbor asked for a recommendation for a handyman and we gave him the name of our vendor. Well, the neighbor asked the handyman to do some plumbing work that was really beyond the skill set of the handyman. Neither the homeowner nor the handyman adequately assessed the scope of the job and what was required. The handyman did not know how to appropriately clear a tub drain that was in a tight spot on the second floor between floor joists. He used a snake and accidentally punched a hole in the pipe, then water gushed out under the flooring and leaked into the room below. The damage was significant and the neighbor was upset with us for the recommendation, but more upset with himself and the handyman for not understanding what was needed for the job. We learned the lesson of being very careful when someone seeks our recommendation for vendors.

I like your perspective @Marcia Maynard. Good points on being able to understand how much risk you can stand. I hear that a lot on BP.  Knowing what your limits are is key to finding quality deals that fit your personal goals. A property may be perfect for me but not so good for the next investor due to the amount of risk it contains. 

Landscape maintenance does not require insurance in California however men working with power tools is always dangerous so if a landscaper does not have workers compensation the homeowner could be liable for any injuries that happen on their property.  If you are a landscape contractor (C27) than you must be insured like any other trade. 

Originally posted by @Mark Hegeman :

As a landscape contractor most of my competitors are uninsured but I find homeowners seem to care more than landlords about insurance, why is that? This is a generalization to elicit feedback but my comment is based on experience. Please let me know if you have had this experience as a vendor and your thoughts. Perhaps as a landlord you can express your feelings as to why you lean one way or the other. Any horror stories of using uninsured vendors would be appreciated also. 

A lesson for all those new real estate investors like myself who aspire to get Bigger Pockets. 

 what type of insurance do you mean ? liability insurance (you causing damage to the property) or workers comp insurance (your guy getting hurt on someones property) ?

landlords don't care about your insurance because most of them are professionals who flip houses as well ...and carry their own workers comp insurance. some of them think that hiding an ownership of a house in LLC or trust protects them even better than insurance....they are wrong,

It's simply a form of self-insurance for investors (whether they recognize it or not)...

For example, I often don't get builders risk insurance on my flips, as I've done the math, and have determined that my lifetime cost will be reduced by covering any issues out of pocket.  The benefit is lower holding costs across my business; the risk is obviously large one-time payments if there is an issue that would have been covered under insurance.

Same with insured contractors.  Most of the time I'll use them (when I determine the cost/benefit is in favor of insured contractors), but occasionally -- and this is often true of landscapers -- I'll determine the risk is relatively low, and the per-transaction savings are great enough that I'm willing to eat a potential cost down the road should there be an issue.

Originally posted by @Mark Hegeman :

Good point J Scott. Do you carry your own insurance then and are fine paying your insurance deductible if a problem arises? 

I have my own liability insurance, but I no longer carry workers comp for my contractors.  If I hire a contractor without workers comp, the risk/cost is on me if he gets injured/killed.

This is why I typically only work with contractor I trust and only allow uninsured contractors to do low risk work.

I am hearing a lot of comments about trust in the contractor and amount of risk you are willing to take.

Let's take it further. All my commercial PM require insurance most require more than the minimum. Any feelings why large PM require insurance, think invitation homes. Obviously anyone renting property to another is doing so commercially but I am looking for reasons why the BP community would think, or know why, large companies require it.  Trust plays no part and risk is always too great to use the uninsured.

@J Scott are you doing your flips out of cash ... ? is that why you don't have builders risk? or if your using private money or HML those lenders do not require it.

Now builders risk to me is fire insurance theft and such during course of construction .. are we talking about the same thing ?  Of course our new construction with bank loans we have more insurance than I can stand almost 5k a home worth.

builders risk.. GL  expanded GL 2 / 10  .. etc its crazy.

@Mark Hegeman   I assume you referring to the last line of my post

on new construction we have builders risk ( what I call fire insurance, theft, wind , storm damage etc).. then we have our General Liablity insurance  as the developer ( we are not the GC) this covers slip fall and construction defects with some exclusions.  And because on the current project 27 homes. We wanted 1 million that will be in force for 10 years. Our carrier require our GC to up his to 5 million.. our contract calls for our GC to have 2 million.. so we had to pay the delta for that.  And our GL in our minds is only to pay for lawyers if we get sued nothing more nothing less.  The our GC has their 5 million and of course each sub has their 1 to 2 million depending on how big they are...

2/ 10 is an extended warranty that our GL also require us to purchase.. And we paid 30k for the GL policy.. another 20k for our GC to increase his limits and 700 a house for the 2/1o and about 550 for the builders risk.. And this is just insurance that 99% we will never use.  however our bank requires it.

Originally posted by @Mark Hegeman :

I am hearing a lot of comments about trust in the contractor and amount of risk you are willing to take.

Let's take it further. All my commercial PM require insurance most require more than the minimum. Any feelings why large PM require insurance, think invitation homes. Obviously anyone renting property to another is doing so commercially but I am looking for reasons why the BP community would think, or know why, large companies require it.  Trust plays no part and risk is always too great to use the uninsured.

There are several reasons why commercial PMs would require insurance:

1.  Marketing.  You look a lot more professional to your clients when you say you only use licensed and insured contractors.

2.  Legal.  There may be extra risk to the clients if uninsured contractors are working on their properties.  By hiring uninsured contractors, the PM is not just incurring more risk on themselves, but also on their clients.  They may lose clients (or incur client lawsuits) if they attempt this.

3.  Scale.  I may spend $500K-$1M per year in labor costs, and perhaps 10-20% of that is with uninsured labor.  That's $50-100K in uninsured labor costs, which represents a relatively small amount of work.  A large commercial PM may spend $10M+ in labor costs, so even 10-20% uninsured is a large amount of work.  A random, freak accident is more likely over a much larger sample.

4.  Oversight.  I have a small enough business that I know my uninsured contractors well enough to know that they won't try to extort/screw me by faking injury or intentionally causing damage to property.  If I had hundreds of contractors and employees and didn't know them, I'd be exposing myself to potentially coordinated threats from contractors.

5.  Compliance.  In most areas, I can legally use uninsured contractors if I choose.  But, in other areas, it's illegal for me to use unlicensed/uninsured contractors.  I will only occasionally use uninsured contractors in those areas where it's required, but when I do, I open myself up to recourse by the state as well as insurance claims.  Commercial PMs likely wouldn't want this additional risk.

6.  Process.  Given that I run a relatively small business, it's easy for me to say to my employees, "Don't use an uninsured contractor without vetting him through me."  But, a commercial PM is going to have lots of employees and they just need simple policies that their employees can follow.  For example, "Never hire uninsured contractors."

Originally posted by @Mark Hegeman :

Landscape maintenance does not require insurance in California however men working with power tools is always dangerous so if a landscaper does not have workers compensation the homeowner could be liable for any injuries that happen on their property.  If you are a landscape contractor (C27) than you must be insured like any other trade. 

We just had a local 'insured' Landscaper get nailed for a wrongful death for basically poor equipment maintenance (required a $40 part). He is contesting the $70,000 fine NOT covered by insurance.

https://www.osha.gov/pls/oshaweb/owadisp.show_docu...

To settle the impending civil wrongful death suit (cited as $3.4million) would require a lot of insurance coverage & most carry the absolute minimum so you know whose probably next in line.

Two things are infinite: the universe and human stupidity; and I'm not sure about the universe.

Albert Einstein