Today’s REI Classroom Lesson

As Tim Norris explains, when completing a rehab, you need to make sure your contractors have the right coverage.

REI Classroom Summary

If your contractors don’t have adequate coverage, claims will fall onto your coverage.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Tim: Good morning. My name is Tim Norris. I’m with the National Real Estate Insurance Group and I’m today’s host on the REI Classroom.

Mike: This show is sponsored by PassiveRental.com.

Tim: Today, we’re going to talk a little bit about contractors when they work on your properties. Whether it be a rehab that you’re doing or a long-term rental that you’re just fixing up a little bit for the next tenant, you really need to make sure that your contractors that you utilize, if they’re not your employees, of course, are carrying the proper coverage.

What I mean by the proper coverage is, they at least need to have general liability insurance as well as worker’s comp insurance. The reason is two-fold: one, especially on the general liability insurance, if they create damage to that property and they’re not properly insured, that damage could be on you.

I’ll give you a quick example. A plumber goes in, does some work. Decides to leave for lunch and forgets to tighten down a joint on a pipe for some reason. It does a lot of water damage to the property. If he’s insured, that ensuing water damage is typically covered by his general liability insurance. If he’s not, guess who gets to pay for it? Likely you and you get to run through the gamut of suing that contractor for the damage they’ve done.

The other issue is if they . . . let’s use a landscape contractor, for instance. They happen to be out mowing the grass at one of the properties and kick a rock up and it hits a passing neighbor kid. If they don’t have proper insurance, even though you weren’t even at the property your liability insurance may have to kick in to protect you from any damage or injury that was done to that person.

Worker’s comp is another big issue. People say all the time, “Well, I really like this contractor, but he doesn’t carry any worker’s comp coverage and he doesn’t carry any general liability.” Well, quick, a very bad story to share with you is one that did happen probably eight to 10 years ago to not a client of ours at the time. They are now.

But what happened was they had a contractor that they used on a very consistent basis and, in the state of Ohio, at that time . . . I’m not an attorney by any stretch, but I’m going to give you not so much a verbatim recitation of the law but a little bit about it in that, in the state of Ohio, if you used a contractor . . . at that time, I believe it was 800 or 1,000 hours in the course of a year and they didn’t have their own worker’s comp coverage, then you, as their contractor/employer, that’s how the law was looking at it, were responsible to carry worker’s comp coverage.

In this case, a very good contractor working for the property owner actually slipped backward and fell down a set of steps. They got hurt. Of course, the property owner wasn’t there. They got a phone call from them and at that time, the worst news that they heard was that they wouldn’t be able to complete the job on time. Well, turns out the guy ended up breaking a hip, was out of work for at least 12 weeks, and the next communication she received from him was a letter from the attorney. Not that he really wanted to sue, but he had to because he was out of work and he had a family to feed like most of us do.

So in this case, if she had engaged properly with worker’s comp insurance or with a contractor that carried their own worker’s comp insurance, she could have avoided all that entire situation.

So again, when you’re dealing with contractors on your property, make sure that, one, they’re carrying the proper coverage. That is, general liability and worker’s comp insurance. And make sure that you verify. Many times, contractors will go get evidence of insurance from their current insurance carrier, but we pay on a quarterly basis. Six months into that policy, that policy lapses, but they still have evidence of insurance that shows the entire year.

On that evidence of insurance that hopefully you’re collecting every time you have a contractor come on one of your properties, it should say either the agency or the company with their contact information. Verify that their policy or policies are current when you engage with that contractor. Hope this helps and have a great day.

Mike: PassiveRental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit PassiveRental.com to learn how to purchase cash flowing, professionally manage rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting PassiveRental.com

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Tim Norris is an real estate industry-recognized speaker and educator on insurance issues. An investor with interests in single-family homes as well as commercial property, Tim is currently President of National Real Estate Insurance Group (NREIG) and resides in the Kansas City area with his wife, two daughters, and son.