If you’re looking for a contractor for your home renovation project, you should always check to see if they have liability insurance and/or a construction bond. 

Just like you as a homeowner need homeowners insurance - your contractor needs insurance too, in case things go wrong with your project.  

While you may not have heard of “general liability insurance” or “construction bonds” - these are two important certifications to look for in a contractor that can protect you in case of emergency. 

Both of these certifications will provide you, the homeowner, with financial compensation, if your project doesn’t turn out as planned.

We spoke to Grant Phillips, Managing Partner at R:SK Advisory - a risk management and insurance advisory, to learn why contractors should have general liability insurance and construction bonds.

What Kind of Insurance Do Contractors Need?

Contractors typically have multiple insurance policies in place which protect themselves and can give you peace of mind in the event that a claim were filed while your renovation is in progress. 

The number one key coverage is General Liability insurance. 

What is General Liability Insurance?

General Liability insurance protects the contractor in the event of a claim where the contractor was responsible for bodily injury or property damage to a third party (ie. not the contractor or one of their workers).

Examples of this could be a ladder falling down and injuring a passerby or falling onto a pedestrian’s vehicle. 

If the contractor did not have general liability insurance, the pedestrian could file a claim against your homeowners insurance to seek reimbursement for financial damages. 

To see if your contractor is insured, ask for a certificate of insurance when you hire your contractor. 

At the very minimum - your contractor should have General Liability insurance - and it’s actually required to apply for a RenoFi Loan.

However, there are other insurance types that we consider “good to have” depending on the job.

Another key coverage would be Workers’ Compensation coverage, which is required by most states because of the potential for employees to be injured on the job. 

Other secondary coverages include Umbrella Liability insurance, which is additional insurance coverage on top of some of their existing policies. 

Also, most contractors have business vehicles that they drive for work purposes so contractors would also be required to carry Business Auto coverage in the event that one of their vehicles were to cause bodily injury or property damage.

All of these insurance types are good to have - but general liability insurance is essential.

What is Contractor’s Insurance For?

So, in what situations would this insurance come into play?

The most common issue homeowners face with renovations isn’t pedestrian injury, rather poor craftsmanship on the part of the contractor. 

There are two common ways this plays out:

A, the contractors work is faulty, thus causing frustration for the client due to minor inconveniences (i.e. the contractors cut too deep and hit a wire causing the fridge to no longer operate) or B, a worst case scenario - severe damage/injury (i.e. a new deck was put on and the foundation wasn’t properly constructed causing it to collapse resulting in serious injuries for anyone who was on it).  

To protect against this, you want to ensure that you have a Certificate of Insurance from the contractor prior to allowing them to perform work on your residence. 

You want to ensure that they do in fact have General Liability insurance and that it includes a subsection of Products & Completed Operations Liability coverage. 

This second piece ensures that in the event of a claim such as the one described above, financial damages can be pursued for reimbursement because of the contractor’s negligence in performing defective work.

On top of general liability insurance - your contractor should also be “bonded.” We’ll explain what this means, how it’s different, and why it matters.

What is a Construction Bond?

A construction bond, also known as a surety bond, protects the individual or company that the contractor is working for. 

In the event that the contractor fails to complete the job, fails to meet certain financial obligations, or causes damage to your property, you could file a claim against the insured’s bonding company to be reimbursed for the cost of said damages. 

This claim would then be paid to the contractor who would then pass those funds along to you - the claimant. 

A bond is essentially a tool which provides peace of mind to a contractor’s clients that that contractor is able to pay a certain amount of money in the event that damages are caused by the contractor’s work.

The most common scenario where a bond would come in handy is if a contractor does not finish the project. 

Whether they file for bankruptcy or just pick up and leave, without a bond - you’re left with few good options on how to move forward with a half-finished renovation. 

While you’re not required to work with a bonded contractor to apply for a RenoFi Loan, it’s highly recommended - just in case of all the situations listed above.

What Kind of Construction Bond Does My Contractor Need?

It depends. There are several different types of construction bonds: bid bonds, performance bonds, payment bonds, and contractor license bonds. 

The former three types are project-specific, and not applicable to home remodeling projects. They come into play with major commercial projects or government-funded home renovations.

However, a contractor license bond is a bond that your contractor will apply for before getting licensed in your local jurisdiction, and is a bond that we recommend your contractor has. 

Many states require that contractors are bonded in order to be licensed, but you should check with your local jurisdiction to see exactly what’s required where you live. 

To see if a contractor is “bonded,” ask them for their bond number and certification. 

Why Does My Contractor Need Insurance or A Bond?

In an ideal world, a contractor would have a construction bond AND liability insurance. 

Working with a contractor who is both bonded and insured is always the recommended approach when shopping for a handyman or company to perform work on your home. It ensures that the contractor has the funds available to reimburse you for any financial damages caused. 

While most homeowners work with amazing contractors that do quality work and finish their jobs, the small percentage that don’t are left totally hanging without an insured and bonded contractor. In those cases, homeowners are forced to pursue legal action - which can often be more trouble than it’s worth. 

The last thing you want to worry about when you’re looking to spend a small fortune to get that new addition put on your home, or that new deck with a sauna and hot tub, is also having to spend another small fortune if things go wrong with no fall back for indemnification.

If a contractor doesn’t, at the very least, have general liability insurance, they probably don’t do great work and you may want to consider using someone else. 

Learn more about the requirements for your contractor to apply for a RenoFi Loan.

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