All Forum Posts by: Paul Winka

 Paul, I put this piece of content toghter for this exact question.  Hopefully it helps.

Vendor Risk

There are 2 business relationships a REI has that can cost you big $ if you do not have proper procedures to insure THEY have the correct insurance coverages in place. Contractor and Property Manager.

Contractor

Every landlord will need to hire a contractor at some point to get work done on a property. In order to save yourself HUGE out of pocket costs, it is vital that you take control of the 3 major risks you have when a contractor is working on your property.

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• 1)Contractor damage they don’t want to pay for. Any claim they do not want to accept responsibility for.
• 2) Assuming they have coverage – The coverage you and the contractor think they have, and what they actually have, may be worlds apart.
• 3)Future claims stemming from faulty workmanship. Example - The new roof from last year starts leaking, causing large damage inside the building and the contractor is not responding.

It is vital that you have the correct processes and contracts in place before work starts. If you don’t, you can kiss your $ good buy, because,

• It’s impossible to get insurance coverage for a claim after it’s happened
• Suing the contractor will take years. and even if you win, they will probably never have the ability to pay you back.

So how do you protect yourself on the front end?

Do these 3 things before hiring your next contractor to greatly reduce your risks.

• 1)Create a list of Insurance coverages and limits you require for any contractor working with you.
• 2)Require you are listed as an “Additional Insured” to their policy.
• 3)Work cannot start until you have a signed contract and certificate of insurance from their insurance agent (note: this is very important. I have had some of my own clients cancel their policies, to find out years later they doctored the date on the certificate of insurance and were using it with their clients as proof of insurance).

WAIT, what about the uninsured Handyman

It’s very common to have a handyman who does good work but does not have insurance. In this case, you have 3 choices;

• 1)They operate as an employee – meaning, you have no recourse if they cause damage. You are 100% responsible.
• 2)Have them work though another contractor on site as a subcontractor/employee of theirs.
• 3)Have them get insurance at a lesser limit. Possibly just a general liability policy.

Example of insurance requirements from a sample Independant Contractor agreement I have for my REI clients,

Schedule A

Work to be performed

This Agreement shall cover the following projects at the following locations:

________________________________________________________________________

Insurance Limits Examples

1. Workers Compensation (Statutory) and Employer’s Liability:

$100,000 each accident for bodily injury by accident; $100,000 each employee for bodily injury by disease; $500,000 policy limit for bodily injury by disease.

1. General Liability Insurance (CGL):

Commercial general liability on an occurrence coverage form. The limits of liability shall not be less than:

$1,000,000 each occurrence (combined single limit for bodily injury and property damage);

$1,000,000 for personal and advertising injury liability;

$1,000,000 aggregate on products and completed operations;

$2,000,000 general aggregate.

Additional Insured Endorsement: Additional insured coverage should be requested to include the Manager, and any other party, as may be required.

1. Automobile Liability Insurance:

$1,000,000 Combined single limit each accident for bodily injury and property damage. Include coverage on all owned, hired, and nonowned automobiles.

1. Certificates of Insurance:

Trade Contractor shall furnish certificates of Insurance and applicable endorsements to Contractor before Trade Contractor commences any work.

1. Insurance Requirements for Sub-Trade Contractors: Trade Contractor shall ensure that all tiers of his Sub-Trade Contractors shall maintain insurance in like form and amounts, including the Additional Insured requirements. Each Sub-Trade Contractor shall provide Certificates of Insurance and applicable endorsements to the Trade Contractor prior to the start of the Sub-Trade Contractor’s work on this project.

@Paul Winka

The custodian has nothing to do with this, they have zero responsibility regarding 1098... if your CPA doesn't know the answer (or doesn't want to find the answer) and instead points his finger towards them - you should consider finding another CPA.

My understanding is that you don't have to send 1098 form because you are not in the business of lending money. 

I flip houses & I'm also an insurance agent who insures a lot of investors.

My flip company sometimes does 3rd party work like kitchen and bathroom remodels for homeowners.

I say that because I operate on all sides of this situation.

What you are seeing is the reality of REI unfortunately.

Rentals need to cash flow / Flippers need the most cost effective rehab they can find.

Hiring legit insured contractors (if you can even find one who isn't booked 6 months out) slows down the process and costs a LOT more because... well... they are legit and have insurance, pay taxes, own vehicles & equipment, etc. The day labor guys are cheap because they don't have the overhead a legit business owner does.

Hiring day labor is what a lot of "us" do - I'm guilty of it too.

But what a lot of investors don't understand is that day laborers are YOUR employees according to most states* (this is not legal advice seek an attorney for advice on your state).  If they get hurt on the job and use their own personal health insurance you can still have an issue. Based on the interview of the injured person at time of medical care their health insurance company may try and subrogate against the state work comp program. You have Work Comp insurance right? No - Get ready for some uncomfortable phone calls with state work comp enforcement employees.

Other than getting your own Work Comp & General Liability Policies there is a gap in coverage when you own the property AND hire laborers. (Also... Getting General Liability can be difficult if you are both property owner and acting as your own General Contractor). This can add a couple thousand dollars to your annual cost of doing business above and beyond what it costs to insure the property itself and many investors don't / won't commit to that expense.

There is nothing wrong with being "Self Insured" as long as you understand the risk you are taking and willing to deal with the consequences if something goes wrong.

My Advice:

Buy your insurance from agents who know about REI and can coach you on what the gaps in coverage are and then you decide what your level of risk tolerance is.

Before you ask...I only handle insurance in Ohio but there are several competent agents on BP I see giving out solid advice and who can handle other states.  

Work with a competent attorney familiar with REI issues who can coach you on liability releases that may help shield you from day labor issues - nothing is bullet proof but getting something up front is better than nothing.

I’ve had better luck hiring handymen than pro contractors and I’ve saved $ thousands doing it . Get yourself a trusted handyman that works for 15$ an hour is my advice

@Paul Winka Sorry, you don’t “call Accord”.  Accord is just the form insurance companies use to format their insurance certificates.  The contractor calls/emails his insurance agent, that agency sends you the insurance certificate.

@Matthew Paul

We have moved to small jobs only...8k-10k and under...I turn down full renovations and rooms additions almost daily...never again will I do a 30 or 60 day project...

You need a Current (today’s date) Accord Certificate Of insurance sent Directly from the agent to you.

The insurance coverages should be obvious.....General Liability and Workers Comp are what you’re most concerned with. Here in FL at least, if the GC has insurance and his sub doesn’t, the GC’s insurance covers it, since in these situations the liability shi$ rolls uphill.

But to be clear, none of their insurance covers a “botched job” or bad workmanship or disappearing or screwing you.

No good , real , licensed and insured contractor advertises on craigslist . Especially a GC . Go cheap get cheap .