Licensed Contractors, Part 2: Insurance and Bonding

In the first part of this three-part series, I discussed the importance of hiring a licensed construction contractor. But licensing isn’t the only form of protection businesses should seek when hiring a contractor. Let’s examine why insurance and bonding are also important considerations.

Commercial Insurance

Most businesses of any size are familiar with the concept of commercial insurance. While this coverage can include a variety of additional clauses and protections aimed at specific professional or industrial risks, it invariably includes some level of general commercial liability (GCL) protection against damages that might otherwise drive the commercial entity to financial ruin. Arizona businesses are also required to maintain worker’s compensation insurance for their workforces, thus protecting them against employee lawsuits related to personal injury cases.

Why Commercial Insurance Matters

Commercial insurance protects clients as well as contractors. The most obvious advantage is protection against on-site liability. If an employee gets injured while working on a business’s project, and the contracting firm doesn’t have the necessary liability insurance in place, the business may be liable to answer for the resulting medical claim from the injured worker. The larger the project, the greater the risk of such liabilities. A contractor that holds commercial insurance also demonstrates a greater sense of responsibility and a more serious attitude toward the work. A contractor that addresses its own obligations professionally is more likely to extend the same approach toward its clients’ projects.

Bonding

Bonding involves the purchase of a specialized form of insurance known as a surety bond. This is a three-party agreement between the contractor taking out the bond, the business or other organization requiring the bond (also known as the obligee), and the surety company that provides the bond. The amount of the bond will depend on the work performed, the size of the contractor, and the value of the services it renders. The financial backing behind the bond serves as a guarantee that the contractor will pay a client up to the maximum amount of the bond’s value for failing to complete the job or for providing substandard work. In Arizona, a contractor that has been involved in business for less than 1 year must purchase a 2-year savings tax bond, while every Arizona contractor must hold a contractor’s license bond through the Arizona Registrar of Contractors.

Why Bonding Matters

While GCL insurance primarily focuses on protecting contractors, contractor’s license bonds are expressly designed to protect the businesses or individuals that hire those contractors. The surety bond is the business’s reassurance that any costly failures on the part of the contractor can and will be reimbursed through the surety company – even if the contractor lacks the financial resources to do so. If the contractor were later to renege on paying back the surety company, the business or individual negatively impacted would still receive its compensation. Additionally, the fact that a contractor is fully bonded against professional negligence or other failures to do its duty gives it credibility. A bonded contractor tends to be a more trustworthy contractor.

How to Make Sure Your Business Has an Insured and Bonded Contractor

Some contractors will claim to be bonded and insured without a shred of truth to back it up. It’s the hiring business’s responsibility to confirm the contractor’s insurance and bonding status before entering into any legally binding agreement. One easy way to do this is by checking the contractor’s status with the Arizona Registrar of Contractors. An internet search on the AZROC website of a contractor’s name will provide their license(s), current status, any complaints, the surety that is responsible for its bond, and the amount of the bond. Another way to do this is by checking the contractor’s Better Business Bureau status. Any contractor that holds BBB Accredited Business status has already presented the Bureau with adequate proof of bonding, insurance, and licensing. Of course, a contractor can have all of these protections in place without belonging to the BBB – but that contractor should be able to give you official documentation that you can follow upon with the issuers of those protections.

You can find the third and final installment of this series on licensed contractors HERE.

This article has been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

© 2018 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This article has been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.

About the author: Matthew Harrison
La Jara Farms

Comments & Reactions

Your Life. Your Connections. Your Way.

Learn more about the people that live around you!

Comments

No comments yet