If you’re hiring a home contractor, you’ve probably heard the advice, many times — make sure your contractor is licensed, bonded and insured.
HThere are a lot of reasons you’ll want to pay attention to those three words.
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A Licensed Contractor Is Probably Experienced
First, it helps to know the terms and understand what licensed, insured and bonded really means — if you’re like a lot of people, you typically gloss over the terms and give them about .004 seconds of thought. If you see a contractor is bonded, licensed and insured, which is common among reputable service professionals, from handymen to plumbers, it essentially means three things:
— Licensed. This means your contractor has likely passed a test or proven to your state that they’re competent enough to be in business. General contractor licensing requirements vary by state, but many states’ standards include showing industry experience, financial stability and specialized training. Your state or city should also have a database you can use to look up the contractor and verify a license or some other due diligence to check up on them.
— Insured. The contractor probably has general liability insurance and workers’ compensation policies that will protect them, their employees and their clients if something goes wrong. If your contractor accidentally drops a nail gun on their foot and winds up in the hospital, their insurance will kick in, protecting you from being liable for an injury on your property.
— They are bonded. This is a form of insurance that guarantees the work you are paying for will get done, even if another contractor has to be hired to finish the job. A third party, such as a corporate surety, would pay for the other contractor to complete the work, and then the contractor must reimburse the surety.
Your contractor, if they’re licensed, is probably going to have a pretty good level of experience, says Kurt Carlton, president and co-founder of New Western, a fix-and-flip residential investment company in Dallas. He says a contractor will likely need to pass written exams on building codes, safety regulations and general contracting knowledge. Some states may have separate exams for different license types.
“Most states require some experience in construction, often with a minimum amount of time working under a licensed contractor,” Carlton says.
Your Insurer Wants You to Work With a Licensed Contractor
A significant reason to consider hiring a licensed contractor is peace of mind: If something goes wrong with a project — like the unlicensed guy you hired just flooded your kitchen and living room — you couldn’t necessarily count on your homeowners insurance to help you out.
“Some insurance policies have clauses that will invalidate your homeowners insurance coverage if work is performed by unlicensed individuals or businesses,” says Brent Thurman, the owner of Keystone Insurance in Provo, Utah. “This means that any claim on your home arising from the work of a non-licensed contractor may be denied, again leaving you responsible for the costs.”
Another selling point for your insurer, and for you, is that a licensed contractor will probably have pretty good insurance, Thurman says.
“Imagine a plumber is working on your home and accidentally breaks a pipe, flooding your house, causing $20,000 in damage to your flooring, furniture and walls,” he says. The plumber’s general liability insurance policy would normally cover repairs to the home in these situations.
“But if they don’t have the proper coverage, you may end up stuck with the bill,” says Thurman.
An unlicensed contractor may have excellent insurance, of course. That said, if they’re not professional enough to get a license, will they be professional enough to have good insurance? That’s a question you need to ask yourself.
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You Can Hold a Licensed Contractor Accountable for Bad Work
W,hile a license doesn’t always guarantee high quality of work, it can be thought of as a receipt for the work being done.
If your contractor delivered shoddy work or skipped town, you can report them to the board that gave them their license or perhaps to your state’s department of commerce (every state handles licenses and contractors differently). If there is no license, it’s harder to hold the contractor responsible.
Just ask Erin Hybart, a licensed real estate agent in Baton Rouge, Louisiana, who had an unlicensed contractor work on her own home several years ago.
“I was having this guy paint the interior, replace the flooring, install granite countertops, paint cabinets, install a patio in the backyard, and a few other minor things,” Hybart said.
She asked the contractor if he had a license, and he said he did. She didn’t verify it, in part because she says she was a little naive, not believing this guy would rip her off, and because it didn’t seem like he was doing anything too grandiose. Hybart had done similar type of work herself. Big mistake.
He would often miss appointments to work on her house, she says, and in the end, he did some work but not all of it, and what he did do, he did badly.
“Some materials were purchased and left on site, but I had to pay another person to finish, or finish what I could myself,” Hybart said.
In the end, she figures she lost $20,000. The same contractor took money from a business colleague and others, she says.
“I started a Facebook group for those impacted by this gentleman to connect and help take him down,” Hybart says. Eventually, she adds, he was arrested and served some jail time on a residential contractor fraud charge.
Hybart says hiring an unlicensed home contractor might seem like a cost-effective choice, but as she discovered the hard way, “if something goes wrong with an unlicensed contractor, your options for recourse can be limited. Unlicensed contractors are not bound by professional standards, so holding them accountable for poor workmanship or unfinished projects is nearly impossible.”
A licensed contractor has a profession and a reputation to maintain. They know if they run afoul of the law, they could lose their license and see their business implode. It’s safer for the homeowner to work with a contractor who knows that if they purposefully turn in shoddy work, or take money meant for supplies and skip town, their career will suffer.
The bottom line, Hybart says, is this: “If issues arise with a licensed contractor, homeowners have clearer paths for legal recourse, including filing complaints with licensing boards, seeking mediation or arbitration, and sometimes taking legal action.”
You can try taking legal action with an unlicensed contractor, as Hybart did, but again, it’s a financial risk. Hybart received some measure of justice, but she is still out $20,000. She says she has financially absorbed the cost and thus recovered, but some homeowners may not be so fortunate.
A Licensed Contractor Is Held to Higher Standards
Hiring somebody with high standards may be the number one reason of all to choose a home contractor who is licensed, insured and bonded.
“Licensed contractors are required to adhere to state or local regulations and industry standards, ensuring a higher level of workmanship and reliability,” Hybart says. She adds: “Licensed contractors typically don’t skip the project permit process, which can be a costly misstep.”
Don’t Assume a Contractor Is Licensed
If you don’t know a contractor well, and they say they are licensed, don’t automatically believe them. Some healthy skepticism couldn’t hurt.
“Don’t just take their word for it,” Carlton says. “Most states have online databases where you can verify a contractor’s license by license number. Look for the contractor licensing board website in your state.”
You can sometimes verify a contractor’s bond with the bonding company they say they are using, he adds.
Carlton also says the usual red flags can be helpful in recognizing whether your contractor may not be on the up and up, things like an unprofessional or evasive demeanor. “Are they hesitant to provide license information or answer questions directly?” says Carlton.
Cash-only requests can be a hint of trouble, too. A shady contractor may insist on cash payments to avoid a paper trail.
Really good deals can also be a bad sign.
“If the price seems too good to be true, it probably is. Licensed and bonded contractors may charge more due to the overhead costs associated with licensing and insurance,” Carlton says.
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Why Your Contractor Needs to be Licensed originally appeared on usnews.com
