Is it important for your rehab contractor to have insurance? Why?
I probably don’t have to tell you that we live in a very litigious society. It seems as if there is a lawyer with a lawsuit hiding behind every corner, doesn’t it? Look at the warning labels on the gas pumps next time you fill up. Do not smoke, do not drink gasoline, and do not use cell phones while fueling your vehicle. All of these warnings are the result of some lawsuit somewhere. You can bet on this.
Your Investment Property Deal
Now, let’s look at your deal. You have bought a house to either rent it or to fix it up and sell it on the real estate market. You hire a contractor to do the work for you. If anything goes wrong, it’s the responsibility of the contractor, right?
Let’s assume the general contractor you hire goes out and hires sub-contractors to do the work on your property. Any errors, mistakes or lawsuits are not your problem, are they?
Wrong, wrong, wrong.
If there is a loss, everyone is going to get sued, including you.
Who has to pay for the loss?
The person with the ability to pay.
If your contractor hired some local guys off the street or picked them up from the front of a big box store, do you think any of those guys have any insurance or any ability to pay for your loss?
So what should you look for as proof of a contractors insurance?
What to look for
Well, the easiest way is to get your contractor to give you a copy of his Accord statement.
This will show if the company is covered, the limits of coverage and who is the agent providing the coverage.
Next, call the agent and see if the policy is in force. This is important.
Why? Because a lot of contractors buy a policy to get the statement and then cancel it a month or so later to save paying the premiums and be able to provide a lower bid on the proposals.
Then if you get the Accord statement, look on the left hand side under the heading ’Type of Insurance’
There are 2 boxes, one says ‘claims-made’ and the other says ‘occur’.
You want the one to say ‘occur’ or occurrence.
Why is this important?
Ok, let’s say the contractor has a policy that expires on December 31st. Your property catches on fire on that day, but it takes the fire department until January 15th to find out that the wiring in the house was installed improperly and this is what caused the fire.
No sweat, right? Your contractor had coverage when the fire started so you should be good to good.
There would not have been a claim made on the policy until after the cause was discovered. Therefore on a claims made policy, there would be no coverage. So you would lose.
On the other hand, with an occurrence policy, if the occurrence (the fire) happened during the policy period (which it did) then the policy would be in force regardless of when the claim would have been made.
Think about an injury that happens in one year and perhaps the full diagnosis and seriousness of the injury is not determined for months or years later.
Your property means a lot to you, do it right the first time, look at the bids you receive, ask questions and demand answers. Lawsuits are no fun for anyone.