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Does My Contractor Need to Carry Contractor Insurance?

Answers for Homeowners Looking for Home Remodeling Contractors


Contractor Insurance
Public Domain: Anna Cervova
First you need to know that there is no single requirement for contractor insurance. Home remodeling contractors are licensed or registered by state or even county--there is no U.S. federal regulation of contractors. That said, it is possible to supply some general information from a review of several states' requirements.

Q: Does the contractor need to hold contractor insurance?

A: Contractor insurance is a misnomer that I hear a lot. Home improvement contractors are often required to carry workman's compensation and liability insurance. But this insurance protects the contractor, not the homeowner. A surety bond is the type of "insurance" that protects the homeowner.

Q: Why is the surety bond sometimes confused with insurance?

A: For one, contractors obtain surety bonds from insurance companies. Also, from the viewpoint of the consumer, the surety bond operates much like insurance. It helps "insure" them against certain conditions. If the contractor fails to meet conditions of the bond, the consumer may file a claim against the bond. But the surety bond isn't just there for the consumer. In some cases, this instrument can also be used by the contractor's suppliers or employees.

Q: What amount does the contractor need to carry?

A: Not much. Again, the amount does vary by state, but California requires general contractors to carry $12,500; Oregon $20,000; Arizona $5,000. Also, these amounts vary according to the contractor's projected gross income. Not only that, but specialty remodeling contractors (vs. general contractors) typically hold bonds of lesser amounts.

Q: Does that mean that in California, for example, I can file a $12,500 claim against a bad contractor?

A: No, not necessarily. These bond amounts are per contractor, not per job. So, the $12,500 may be shared among other jobs.

Q: Can I recover damages from my contractor if he finishes 2 days late for my addition project?

A: Surety bonds aren't there for every little problem between homeowners and contractors. There are two main areas that are covered.

First, consumers whose personal family residence that is damaged as a result of a violation of the licensing requirements can file against the bonds. Second, as California states, consumers who are "damaged as a result of a willful and deliberate violation [of licensing requirements] or by license fraud can file. Fraud is one area that the state licensing boards are especially interested in preventing. As far as "damage" goes, that's a vague area that often can only be determined in a court of law.

After all, what is "damage"? Your addition was finished one month late and you're simply mad about it? Is that damage? Or, it was finished one month late, and you were unable to set up your anticipated home business and lost $5,000 in project revenues. Is that damage?

Q: How do I recover money from this bad contractor?

A: If the contractor has failed to make good, then go to the state contractor licensing board and the surety bond company. The boards regulate bonding, and should have information on hand as to which insurance company you should contact. After that point, you should no longer have to deal with the contractor. The insurance company will be the go-between. The insurer may have to take the contractor to small claims court to recover money paid out from the surety bond. In any case, that's another reason why it's not truly "contractors insurance": the contractor is required to pay the money back to the insurance company.
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