What does it mean when a contractor advertizes he is bonded or insured?
As an owner of a commercial building, it is important to understand that a contractor's advertisement as to "bonded" or "insured" can turn out to mean entirely different situation than what you imagine.
Contractors often place signs on their advertisements indicating they are bonded or insured.
Under Wisconsin's safe place law and perhaps other states, there are many risks that an owner of a place of business bears in situations where the business owner contracts with a contractor to renovate or construct an addition to his premises. We will briefly explore this area of insurance of contractors.
An insurance company can issue a performance bond, a surety bond, to a contractor that guarantees satisfactory completion of a project.
Generally, because of the cost of such bond, this is not done in small private projects. It is more prevalent in public projects. These bonds pay when a contractor goes bankrupt so that the owner receives money for his loss up to the limit of a performance bond.
It is not prevalent that a small business owner will be able to negotiate that the contractor will buy a performance bond for his project. Thus, it is important for the owner to do due diligence on the financial soundness of the contractor because of the risk that the contractor may become insolvent during the project and fail to complete it.
Then there is the question of general liability insurance of the contractor.
Again, the owner needs to delve deeply into the subject.
First of all, there are typically liability limits on the coverage.
Are these limits adequate for the scope of the project? For example, is a limit of $100,000 per occurrence and $200,000 aggregate sufficient for your project? What coverage is included in the policy? Coverage may include
o Medical Payment per Person
o Fire Legal Liability o Property in Your Care, Custody or Control
o Personal and Advertising Injury o Products and Completed Operations
o Personal Property: On Premises (Excluding theft)
o Personal Property off Premises (Excluding theft).
Each of these coverages may have a different limit.
The policy may have Optional Coverage's for Special Risks such as:
o Increased Personal Property: On and off premises
o Theft of Money and Securities
o Valuable Papers and Records
o Accounts Receivable
o Employee Dishonesty
Does the contractor have worker's compensation insurance? Most states require such coverage.
However, the contractor may be exempted due to the number of employees he hires.
As an owner, in some states, you may be able to buy insurance during the construction or renovation of a property yourself.
This may reduce your costs of multiple policies of contractor and subcontractors. This is not typical.
Instead, usually, the general contractor and sub-contractors own their own insurance policy with any provider of their choosing. The advantages of the owner buying the insurance may include more stringent safety and loss control procedures provided you are a sophisticated safety specialist or employ such a person.
o You may also improve your risk against claims.
The disadvantages include more administrative costs, and risks that the contractors' employees may claim non-project injuries. You may also experience gaps in insurance coverage for events you did not contemplate.
Should an injury arises to an invitee to your property, you may be liable under the safe place law of your state or under the theory of employer's vicarious liability of an independent contractor.
Watch out for these events:
a. The contractor injures an invitee
b. The contractor conducts an ultra-hazardous activity
c. You hold out the contractor as your employee or agent.
It pays to know the local laws on safety as well as the federal laws to thoroughly assess your exposure to risk.
A team of professionals including a lawyer versed in this field and a safety specialist can prevent a catastrophic loss to you.