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Licensed, bonded, insured: What it means to you

March 2017

 

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You have decided to build or remodel your home or busienss. This is a big step, both financially and emotionally. Choosing the right contractor to complete this project is also a big decision. 

Hiring the wrong contractor can lead to cost overruns, delays, substandard work and sometimes even litigation over disputes regarding the timing, quality, or cost of the project. While it's tempting to choose a contractor based solely on an online portfolio of completed work or customer testimonials, don't overlook the importance of making sure your contractor is properly licensed to perform the project as well as adequately bonded and insured. 

Licensed

Certain types of contractors may be required to hold a state or local license demonstrating that they meet minimum training or experience requrements. Thest types of contractors generally include electrical, HVAC, and plumbing and refrigeration contractors, but this may vary by state. In many states, and even individual municipalities, contractors must be bonded to be eligible to be licensed. 

General contractors taking on jobs involving any usually licensed trades, as listed above, generally should be licensed themselves. Don't be afraid to ask a contractor for their license number. Steer clear of contractors who lack licensing required in your state or locality. If your construction work is the result of an insurance claim, your agent may be able to advise you, or check with your attorney to resolve any licensing issues. 

You can use a contractor's license number to check with state or municipality about any complaints filed against that contractor. Some states provide a website to check licensing for some trades. You can also check with your local Better Business Bureau for its rating of particular contractor. 

Hiring a licensed contractor does not guarantee all will go smoothly with your project. Even licensed contractors can run into problems, therefore it is important to check that your contractor is bonded and insured. 

Bonded And Insured

These terms are similar, but not the same. A bonded contractor has secured financial backing- sometimes called a performance bond or contract bond- from a bonding company or insurer that will provide funds to pay the consumer if the contractor doesn't perform as required. Performance bonds protect property owners against problems not covered by the contractor's insurance. 

For example, if the contractor should fail to complete the project (because of bankruptcy, death, or just walks away mid-project, etc.) a performance bond may provide funds to complete the project. This is important if you need to hire another contractor to complete your project. Ask your contractor for a copy of the performance bond. 

Make sure any contractor you haire is also insured with both commercial general liability and workers' compensation insurance. The contractor's liability coverage protects you from bodily injury or property damage or losses caused by contractor negligence or negligence by their employee or sub-contractor. 

Their workers' compensation coverage protects you if an employee of the contractor is injured while working on your property. Ask for the contractor's certificates of both their liability and workers' compensation insurance if they are not supplied to you along with the bid. A certificate of insurance is a summary provided but the contractor's insurance company showing the policy numbers and listing the coverages that are in place and the time period covered. 

Asking questions before you hire a contractor can protect you from the financial consequesnces of a poorly run project. It's also a good idea to consult with your attorney before signing contracts and to ask your local independent insurance agent to review your insurance coverage and the certificates provided by the contractor to make sure you are adequately protected. 

Thank you John Fisher and The Cincinnati Insurance Companies for contributing this information. 

 

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