When a homeowners association hires a landscaper, roofer, plumber, electrician, tree service, general contractor, or other vendor, cost is naturally an important consideration. Boards have a responsibility to use association funds wisely and obtain competitive pricing.
But the lowest bid is not always the least expensive option.
Before allowing a contractor to work on association property, there is another important question every board should ask:
Is this vendor properly licensed, when required, and adequately insured for the work being performed?
Hiring an uninsured vendor may save the association money on the front end. Unfortunately, those savings can be insignificant compared with the financial exposure created when something goes wrong.
Insurance Protects More Than the Contractor
Every vendor working on association property introduces some degree of risk.
A landscaper could damage a parked vehicle with flying debris. A roofer could fall from a building. A plumber could accidentally cause extensive water damage. A tree contractor could drop a limb onto a home. A contractor’s vehicle could be involved in an accident while performing association business.
When an accident happens, the important question quickly becomes:
Who is financially responsible for the resulting damage or injury?
A properly insured contractor has an insurance program specifically intended to address many of the risks associated with operating its business.
Depending on the vendor and type of work, appropriate insurance might include:
- Commercial general liability
- Workers’ compensation and employers’ liability
- Commercial automobile coverage
- Umbrella or excess liability
- Professional liability for certain professional services
- Other specialized coverage appropriate to the work
Not every contractor needs every form of insurance. The appropriate coverage depends upon the services being performed and the risks involved.
The important takeaway is that “insured” does not necessarily mean “fully insured for this particular job.”
What Happens When the Vendor Is Uninsured?
Imagine that an HOA receives two proposals to remove several large trees.
One company provides evidence of appropriate liability and workers’ compensation insurance. The other company is $3,000 cheaper but cannot provide acceptable proof of coverage.
The association chooses the uninsured contractor to save $3,000.
During the project, a worker is seriously injured and a falling tree damages a building and several vehicles.
That $3,000 savings suddenly looks very different.
Instead of having the contractor’s insurance program available to address covered claims, the accident may result in disputes involving the contractor, homeowners, the association, and potentially the association’s own insurance carrier.
Even if the association is ultimately determined not to be responsible, the incident can still create substantial legal expenses, management time, insurance complications, and disruption for the community.
The risk did not disappear when the association hired the cheaper vendor. The association simply failed to transfer as much of that risk to an appropriately insured contractor.
Workers’ Compensation Is Particularly Important
Workers’ compensation deserves special attention whenever a vendor has employees performing physical work on association property.
North Carolina generally requires employers with three or more employees to maintain workers’ compensation insurance, subject to statutory rules and exceptions.
A board should therefore never simply assume that individuals working for a contractor are properly covered. Depending upon the project, the association or its management company should verify applicable coverage before work begins.
This is particularly important for higher-risk services such as roofing, tree removal, construction, electrical work, excavation, and projects involving ladders or heavy equipment.
Uninsured Vendors Can Also Create Problems for the HOA’s Own Insurance
One risk that associations sometimes overlook is the potential impact on the HOA’s own insurance program.
Insurance companies do not evaluate an HOA solely by looking at whether it has experienced a claim. Underwriters are concerned with the nature of the risk they are being asked to insure and the measures being taken to control that risk.
An HOA that routinely allows uninsured contractors to perform significant or hazardous work may create an underwriting concern.
Depending upon the circumstances, policy terms, claims history, and carrier requirements, poor vendor risk-management practices could potentially contribute to:
- Loss-control requirements imposed by the carrier
- Increased insurance premiums
- Higher deductibles
- More restrictive coverage
- Difficulty obtaining competitive renewal terms
- Nonrenewal of coverage
The distinction between cancellation and nonrenewal is important.
Under North Carolina law, an insurer’s ability to cancel certain policies in the middle of a policy term is restricted. N.C. Gen. Stat. § 58-41-15 identifies permissible circumstances that can include an increased hazard or material change in the risk assumed, a substantial breach of contractual duties or conditions materially affecting insurability, and a willful failure to institute reasonable loss-control measures after written notice from the insurer. G.S. 58-41-15 generally requires advance written notice when cancellation is permitted.
At renewal, however, an association can face a different problem. Under N.C. Gen. Stat. § 58-41-20, an insurer may refuse to renew a qualifying policy at expiration provided it follows the statutory notice requirements. The statute generally requires at least 45 days’ notice of nonrenewal and requires the notice to state the precise reason for the decision.
This does not mean that hiring one uninsured contractor automatically causes an HOA to lose its insurance.
It does mean that boards should think carefully before establishing a pattern of accepting avoidable risks, particularly if an insurance carrier, agent, management company, or association attorney has recommended specific vendor insurance requirements.
A Certificate of Insurance Is Important, But It Isn’t the Whole Story
Obtaining a Certificate of Insurance, commonly called a COI, should generally be part of an HOA’s vendor qualification process.
But simply having a certificate does not automatically establish that every risk associated with the contractor’s work is adequately insured.
Depending upon the project, the association may need to consider:
- Whether the policies are currently in effect
- Whether appropriate liability coverage exists
- Whether workers’ compensation is applicable
- Whether vehicles being used are properly insured
- Whether subcontractors will be used
- Whether the coverage limits are appropriate for the project
- Whether additional insured status is required by contract
- Whether the contractor holds required licenses
- Whether there are exclusions relevant to the work being performed
For significant projects, the HOA should coordinate these requirements with its insurance professional and, where appropriate, association counsel.
The Lowest Bid Isn’t Necessarily the Best Value
This is where boards sometimes face a difficult decision.
An uninsured or inadequately insured contractor may be able to perform a project for substantially less than an established contractor carrying appropriate insurance.
There is a reason for that.
Insurance is a legitimate cost of operating a professional contracting business. So are licensing, properly classified employees, safety programs, equipment, training, taxes, and regulatory compliance.
A responsible contractor incorporates those expenses into its pricing.
The board therefore needs to consider whether a lower bid represents genuine efficiency or whether some of the cost difference exists because the contractor isn’t carrying expenses and protections that a professional contractor would ordinarily maintain.
Saving $2,000 or $5,000 on a project makes little financial sense if doing so creates a significantly larger uninsured exposure for the association.
There is a difference between reducing an expense and transferring risk back to the homeowners.
Good Vendor Screening Is Good Governance
An HOA board is entrusted with maintaining community property and administering money collected from its homeowners.
Prudent stewardship therefore requires considering more than price.
Before authorizing significant work, a board or its management company should consider asking:
- Is the contractor properly licensed when licensing is required?
- Does the contractor carry appropriate commercial general liability insurance?
- Does it carry workers’ compensation when applicable?
- Will vehicles or heavy equipment be used on the property?
- Will subcontractors be involved, and what insurance requirements apply to them?
- Are the contractor’s insurance limits appropriate for the size and risk of the job?
- Have required Certificates of Insurance been obtained before work begins?
- Does the association’s insurance carrier or agent recommend additional requirements for this type of project?
The answer does not necessarily need to be identical for every vendor. The risk associated with an office-supply vendor is obviously different from the risk associated with a roofing or tree-removal company.
The standard should be reasonable insurance requirements appropriate to the work being performed, applied consistently.
Insurance Requirements Aren’t Red Tape
Boards can occasionally view insurance requirements as an inconvenience, particularly when an otherwise attractive contractor cannot provide the documentation necessary to satisfy the association’s requirements.
But vendor insurance requirements are not intended to make it difficult for contractors to work with an HOA.
They are intended to protect the association.
They protect association assets. They help protect homeowners. They provide another potential source of financial responsibility when an accident occurs. They demonstrate responsible risk-management practices. And they can help protect the HOA’s relationship with its own insurance carrier.
Most importantly, they help prevent a relatively inexpensive contractor decision from becoming a very expensive association problem.
The Bottom Line
A homeowners association is responsible for protecting property that may be worth millions of dollars and managing the financial interests of dozens or hundreds of families.
That responsibility deserves more consideration than simply selecting the lowest proposal.
Appropriately insured vendors may cost more, but the HOA is purchasing more than the service itself. It is also requiring the contractor to maintain a reasonable level of financial responsibility for the risks created by its operations.
Hiring uninsured contractors can expose an association to unnecessary liability, complicate claims, increase the potential financial impact of an accident, and potentially create concerns for the HOA’s own insurance carrier.
For an HOA board trying to protect its homeowners and association assets, verifying vendor insurance isn’t unnecessary bureaucracy.
It’s prudent financial stewardship and sound risk management.
This article is provided for general educational purposes and should not be considered legal or insurance advice. Insurance requirements vary depending upon the contractor, scope of work, association policies, and insurance program. Associations should consult their insurance professional and legal counsel regarding appropriate vendor requirements.