Hiring a Contractor: Reduce Your Risks

You have decided to paint your house, add a room, and remodel your kitchen or bathroom, office – or how about having a party and using a caterer? The list of services provided by various contractors and businesses is long and we as consumers need them to maintain our homes and keep our businesses operating. In California if a business provides a service to install, repair, remodel, upgrade, or build including landscaping, gardening, janitorial work, tree work of any kind are required to have a license with the California State Contractor’s Board. In addition the business should have a license in each city they do business in.

You have collected several bids, reviewed them and decided on one contractor. His bid was competitive (the lowest) and you checked with the Better Business Bureau. And now you are ready to hire, but did you?

  • Check if the contractor’s or sub-contractor’s license with the California State Contractor’s Board was still active?
  • Did you check if there were any violations on his license?
  • Did you check if the contractor or sub-contractor provided a signed statement that he has no employees and therefore has not provided proof of workers compensation insurance?
  • Did you get proof of liability insurance and workers compensation insurance? Did you request to be named as an additional insured on the contractor’s or sub-contractor’s liability policy?
  • Did you obtain references?

So why do I ask – what are the reasons behind these questions?

  1. If a contractor or sub-contractor does not have an active license with the California State Contractor’s Board then the contractor cannot obtain liability or workers compensation insurance. The insurance industry now requires a contractor or sub-contractor to hold an active license with the Board in order to purchase necessary insurance.
  2. The Contractor’s Board requires a $12,500 bond be posted and the contractor or sub-contractor signs a statement of fact if he has or has no employees. If he has employees then proof of workers compensation insurance must be filed with the board. The bond gives you some funds to repair only property damages caused by the contractor but $12,500 does not go very far. What if the work that was done caused damage to your neighbor’s place, again the bond is limited?  However Liability insurance will give you more coverage to cover the property damages and/or bodily injury.

An example: You hired a roofer to replace your old roof. Work was done and paid for. You need now to install the satellite dish for your new system. The employee is working up on the roof when his foot goes through the roof and then the whole body crashes through the roof, through the ceiling and falling onto the floor, breaking his leg.  California is a sole remedy state, which means that if the satellite contractor is an employee he will contact his employer’s work comp carrier. If he is the owner, I hope he has health insurance. Either way, the owner of the building needs to contact the roofer to let him know that the roof gave way causing injury to this satellite person. And then you find out the roofer did not have any liability insurance. Then you the owner of the building will be responsible for all the injuries. You own the building is why and you did not check if the roofer had liability insurance. Even though the employee will collect under the workers compensation, the work comp carrier could/would contact you for reimbursement of medical expenses.

  1. If the contractor or sub-contractor does not have liability insurance and if the businessowner’s liability insurance has a year-end audit, the businessowner’s insurance auditor will charge for the contractor or sub-contractor based upon the amount paid to the contractor or sub-contractor. Two factors that establish the contractor or sub-contractor is not an employee is the contractor or sub-contractor has his own license to do business and his own liability insurance.
  2. If the contractor or sub-contractor does not have workers compensation insurance and the contractor or sub-contractor has employees there are several ramifications the businessowner will experience. The first being that if the contractor’s or sub-contractor’s employee is injured on the job and the contractor or sub-contractor has no workers compensation insurance, the businessowner’s workers compensation insurance will pay for all the injuries. And even if there are no injuries, the auditor of the businessowner’s workers compensation insurance will add the amount paid to the contractor or sub-contractor as employee payroll with the appropriate contractor’s classification which will increase the year-end final audit resulting in additional premium due. And if there is an injury it could cause the businessowner’s workers compensation policy to be non-renewed and having to move coverage to a carrier with higher rates. If the businessowner has an experience modification, then the injury would cause the experience mod to increase which will have a major financial impact to the businessowner’s workers compensation premiums.
  3. The biggest issue would be if the businessowner did not have workers compensation. The contractor’s or sub-contractor’s employee does have state regulation against the contractor or sub-contractor but because the businessowner hired the contractor or sub-contractor, then the businessowner could be held liable for all injuries. The problem is the businessowner’s liability insurance excludes any and all workers compensation injuries. The businessowner will not have any defense coverage to defend him.
  4. Most commercial general liability policies today exclude any sub-contractor’s work done in your behalf. Let’s say you are contracted to install some sprinklers but do not own a backhoe. So you hire a sub-contractor to dig the ditches for you and as he is working he hits a gas line.  If he is not licensed he does not have insurance – since he has no insurance he cannot pay for the damages to the gas line and any other damages resulting from the damage to the gas line. Since you, the businessowner contracted him; you now become the responsible person for all the damages incurred but you have a liability policy that excludes work completed by a sub-contractor. Hopefully you have sufficient funds in the bank to pay for the damages.

So you are not a businessowner, you are a homeowner – you are no more safe than the businessowner is.

  1. If the homeowner has not obtained proof of liability insurance then the homeowner has no recourse against the contractor for damages resulting from his work.  Again, if the contractor has a license, then he would have the bond in place but again $12,500 does not go far. And what if the damages caused by his work also damaged your neighbor’s home. You had an electrician do some work and the work shorted, causing a fire which also burned you neighbor’s house. Just like the businessowner you have damages and you would be responsible for the damages to your neighbor’s home.
  2. If the contractor has employees and you did not obtain proof of workers compensation again even though you are a homeowner you are not exempt from employee injuries if your contractor has not acquired workers compensation insurance. Although most homeowner policies provide workers compensation, it is activated when an individual has worked for the homeowner for more than 100 hours in a 90 day period – this usually does not qualify a contractor’s employee as the contractor’s employee will not have worked in excess of 100 hours. However, the good part is the homeowner’s policy would defend the homeowner and pay if necessary. Down side would be the homeowner policy would be non-renewed and it would be hard to find another carrier with at an acceptable premium.

Hiring a contractor or sub-contractor requires research. Not only do you want the best price, but you also want the contractor or sub-contractor take full responsibility of their work and any damages or injuries that may result from there. The California State Contractor’s Board provides a book at no cost that lists what you need to know to hire a contractor. It also outlines what your rights are and what is available to you to help resolve a problem. The first step is to hire a licensed contractor.

This article was originally prepared for PAPA Pesticide Applicators Professional Association. Click here to visit their web site.

Jeanette Heinrichs


Vice President | Kingsburg