Contractor faulty workmanship or injury on the job site are two risks typically excluded from your investor client’s insurance policy. Whether they are hired, leased, temporary, or volunteer workers, if structural work fails or a worker is injured while on the job site, there is likely no coverage available for the damage or injuries. Although a fire started by a contractor might be covered by insurance, the insurer will likely attempt to recover any payout made to your client from the contractor’s insurer if they have coverage.
What Type of Damage is Excluded?
Typically damage to the property itself and any bodily injuries caused by faulty workmanship are excluded. For example, a roof collapse or deck support failure could cause damage to the property and potentially injure workers currently remodeling other parts of the property or future tenants and their guests. In this instance, neither the property damage nor the injuries would be covered.
Why is This Damage Excluded?
The reason for these exclusions is to avoid an overlap of coverage. Any property damage, injuries to employees, or negligence in workmanship is covered under insurance policies that contractors procure for themselves, such as General Liability and Workers’ Compensation. Subcontractors should have liability coverage too.
What Does the Technical Lingo for This Exclusion Look Like in the Investor Client’s Policy?
Sample policy language may look like this:
“Employees of Independent Contractors Endorsement
The coverage under this Policy does not apply to “bodily injury”, “property damage”, “personal injury”, “advertising injury”, or any other injury, loss or damage sustained by any employee of an independent contractor contracted by You or on your behalf.
The coverage under this Policy also does not apply to “bodily injury”, “property damage”, “personal injury”, “advertising injury”, or medical payments arising out of operations performed for you by independent contractors or your acts or omissions in connection with your general supervision of such operations.”
*As insurance policies may vary, investors should check their own policy for language specific to covered properties.
How Much Can This Type of Damage Cost the Investor Client?
Injuries don’t happen on every job, but using power tools like nail guns and saws or any work involving a ladder is quite risky. Improper construction of a deck could severely injure future tenants and their guests. Careless soldering techniques could start a fire that burns the whole building. Unfortunately, when someone is hurt, lawsuits can fly in every direction, including toward the owner of the property. Construction risks should be taken seriously, as one accident could take someone’s life.
What Can the Investor Client Do to Protect Themselves?
Many investors worry that their contractor will cost dramatically more if they’re required to obtain the necessary licensing, permits, and all the recommended insurance coverages. But hiring someone who isn’t properly licensed and insured can ultimately hurt an investor’s business more than if they had paid more for labor. If intricate work is being done, such as a room addition, investors should hire appropriately qualified workers and ensure their contractor has the correct license for their class of work. Many states have several different licenses that certify a contractor’s qualifications in a given discipline. Plumbers and electricians usually have specialized training and designations, for example.
Investors should also be sure their contractor procures any necessary permits. Each city’s ordinances vary, but permits can cover exterior painting, roof repairs, and more. If your investor client’s contractor gets caught without the appropriate permits, any fines could come back on the investor. If structural elements fail because they haven’t been reviewed by an engineer, the consequences could be even worse.
Investors should obtain a copy of all liability policies in force and require the contractor to add them or their business as an additional insured/certificate holder for the entirety of the project. This can give the investor some protection if they are named in a lawsuit, and generally does not cost more to add. Being listed on the policy also ensures that the investor is notified if coverage lapses or is canceled.
Investors will also want the contractor to guarantee their work for a reasonable period of time after the job is done—12 months is a good rule of thumb.
What Type of Insurance Coverage Should a Contractor Have?
At the bare minimum, a contractor should carry a General Liability policy and, if they have employees, a worker’s compensation policy. Products and Completed Operations coverage should be included in the contractor’s liability policy. This covers damage that occurs after the work is completed. For example, if an improperly soldered pipe fails three weeks after an investor pays their contractor, this coverage can take care of the cost of the repairs. If your investor client isn’t sure of the coverage being presented to them, they should consult you.
If your investor client has hired a smaller company that does not have workers’ compensation, it might be a good idea to ask for proof of health insurance too. Most independent contractors have policies that cover their workmanship, damage to property, and injuries they may cause to others, but not injuries they suffer. Contractors who have health insurance will have a safety net if they get hurt. They’ll be less likely to sue your investor client to pay their medical bills.