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Diminishing the liability factor.

Diminishing the liability factor

Developers and property owners, beware! Hiring unlicensed and/or uninsured contractors can be dangerous to your financial health.

In California and other states, the law declares, "If a person is performing services for which a license is required pursuant to the Business and Professions Code and that person does not have such a license, he is an employee." The courts interpret this to mean that the property owner is liable for any injury that occurs to the unlicensed contractor or his employees while they are performing work on the property.

It is estimated that over 50 percent of firms or individuals performing business for the general public are unlicensed and uninsured. This poses a huge problem for the property owner/ developer who must frequently hire contractors - sometimes on a one-shot basis. In the event the contractor is uninsured, the property owner's insurer is entitled to, and must charge, an appropriate premium. This can add up to a substantial charge, because, in the absence of a breakdown between materials and labor, the carrier will pick up the entire contract amount times the appropriate rate, as the following true-case scenario illustrates.

A costly mistake

A developer hired a roofer at a cost of $40,000, which included labor, materials, and insurance. In reality, the roofer did not buy insurance - he planned to take the insurance money as extra profits. However, one of his workers fell off the roof. The developer was held liable for the injury, and his insurance company had to pay the claim. Because the roofer was unlicensed and uninsured, he was, by law, technically an employee of the developer.

An investigation into the incident revealed that the developer could have hired a licensed, insured contractor to perform the job at a cost of $46,000. As it turned out, the job cost him the original $40,000 plus an additional $16,000 in premiums billed by his insurance company. (The developer was charged the contract amount of $40,000 times the roofing rate of $40.08 per $100, the standard rate off the insurance table, or $16,320 in added premiums.) In addition, he was charged a $9,000 increase in future premiums on his workers compensation insurance.

Protect your assets

The pitfalls of dealing with contractors can strategically be avoided if you follow these guidelines for qualifying firms competing for your business.

* Request a contractor's qualification statement. Available from local American Institute of Architects' offices, AIA Document A305 is invaluable in evaluating the qualifications of contractors. The completed statement will provide a profile of the contractor including ownership, longevity, and licensing; current financial statements, trade and bank references; detailed descriptions of in-progress and past projects; facts about pending litigation involving the firm; and facts on projects the contractor failed to finish.

* Request a certificate of insurance. This is a simple form the contractor's insurance agent/company fills out and mails directly to you. The certificate should include the name of the company, the policy number, term of the policy, coverages, and limits. Pay special attention to the limits and make sure they are adequate. These limits should be approximately $300,000 for small jobs, at least $1 million for larger jobs. For practical purposes, insist on at least $500,000.

* Investigate the insurer to make sure the company is qualified. Contrary to popular opinion, the insurance industry as a whole is in a weakened financial condition - 25 percent of all firms fail insurance commissioners' insolvency tests. Your own insurance agent or broker can validate the contractor's company for you.

* Demand a signed contract. For major work such as an addition or renovation, make certain the contract specifies what work will be done and who will be responsible if employees are injured. Insist the contract contain a "hold harmless" clause. This places the responsibility for all accidents squarely on the shoulders of the contractor.

In today's litigious society, the tenant or contractor's employee who is injured on the property during construction is certain to sue the property owner. With a hold harmless clause securely in place, the liability and loss is passed on to the contractor where it rightfully belongs. Make certain that the hold harmless clause includes any subcontractors the contractor may hire.

* Consider a continuing contractor agreement. Whether you own one building or several major developments, a continuing contractor agreement is in your best interest. This contract can cover all routine maintenance work as well as major capital improvements such as roofing re-plumbing, and so forth.

Once you have found a contractor who has proved reliable, ask your attorneys to draw up an agreement that includes the following: a clearly defined scope of work, insurance requirements for each necessary coverage, a hold harmless clause, and terminology as to what constitutes an acceptable insurance company (ideally the company should be a Best-rated "A" company or better).

Risk management

Doing business is risky. While a variety of economic factors influence bottom line profits, the lawsuits and litigation prevalent in today's society can have a devastating effect on business. Higher insurance premiums are certainly a major financial consideration. However, the cost of time spent attending to legal matters such as document production, depositions, and court appearances can far overshadow any insurance premium increases.

In today's environment, the key to a company's long-term survival lies in risk management and in paying closer attention to insurance matters. In part, risk management means passing liability to another party whenever possible.

By selecting licensed, insured contractors and having work performed under the terms of a tightly drawn up contract, the property owner lessens his or her liability and assumes greater control of the factors influencing cash flow and profits. However, if the property owner decides not to go to the extreme of obtaining contracts for every job performed, the owner should request license documentation and certificates of insurance from all firms doing business on the premises.

William D. Bolton is chairman of the board and CEO of Bolton & Company. He has more than 25 years experience in the insurance industry, has held top positions on numerous industry boards and commissions, and has served as chairman of the board for Assurex International, a global partnership of independent insurance agents and brokers, which specializes in risk management insurance and related financial services.

Mr. Bolton has served as president of the Western Association of Insurance Brokers chairman of the National Advisory Board for the Travelers Insurance Companies, and chairman of Western Compensation Insurance Company, Ltd., Cayman. He has also served on the California Insurance Commissioner's Fair Practices Commission and the California Workers Compensation Institute on Workers' Compensation.
COPYRIGHT 1989 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:developer liability insurance
Author:Bolton, William D.
Publication:Journal of Property Management
Date:Jan 1, 1989
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