How many times have you seen or heard the phrase that a contractor/remodeler is “bonded and insured”?
Probably plenty. But what does this phrase really mean? Usually, it is used to make you, the potential customer, feel at ease – that if there is a problem an insurance or bonding company (usually called a surety) may step in and assist in resolving your problem, should the contractor default.
However, the safety net that you think exists may not. The phrase “bonded” usually has little applicability to residential construction – normally only commercial contractors on relatively large commercial projects obtain payment and performance bonds. Bonds of this variety are rarely issued on residential projects.
The word “insured” can mean many different things, depending on the type of insurance the contractor has, and other factors. Usually, an owner is interested in making sure that if a problem arises after the contractor leaves the project (i.e. defective construction and resulting damage), and the contractor has refused or is unable to adequately repair the defect and damage, an insurance company may assist in making the homeowner whole. This type of policy is usually called “comprehensive general liability” (“CGL”) insurance. However, even if your contractor has CGL coverage, the insurance company may deny coverage based upon policy exceptions and exclusions. Further, some types of insurance that the contractor may have obtained will normally not provide coverage for post-completion defects and resulting damage. For instance, builder’s risk insurance, which contractors usually obtain because a construction lender or other third party requires it, normally provides coverage only for events that occur during construction, and rarely provides protection for events occurring after the builder has left the project. Similarly, worker’s comp insurance rarely provides coverage for construction defects.
So what to do? Before you reach an agreement with your contractor consider asking him/her to:
- Produce a copy of the actual insurance policy. Sometimes builders will provide a one page document usually called a certificate of insurance as proof of coverage – unfortunately, some reported Texas cases indicate that this kind of form does not constitute conclusive proof that the insurance coverage exists, and is in place.
- Determine what type of policy it is – general liability, builder’s risk, etc.
- Once you obtain the policy, make sure that the coverage period identified on the declaration page indicates that the insurance will be in effect when your project takes place.
- Contact your contractor’s insurance agent or company to make sure the policy is still in effect – I have handled cases where the contractor paid the initial installment premium, and then defaulted on successive premium payments, resulting in a cancellation of the policy midstream in the policy period.
Consider hiring an attorney or other professional to evaluate policies and coverage.