In today’s construction industry, the importance of working with licensed contractors cannot be overstated. Beyond ensuring quality workmanship and regulatory compliance, licensed crews provide essential liability protection that shields property owners from potentially catastrophic financial and legal consequences. This comprehensive guide explores the critical reasons why choosing licensed contractors is not just a preference—it’s a necessity for protecting your investment, your property, and your peace of mind.
Understanding the Financial Stakes: The Cost of Liability Protection
The construction industry faces significant liability risks, with financial implications that can devastate unprepared property owners. General contractor insurance costs range from $796 to $1230 per year. While this might seem like a significant expense, consider that the average cost of a single bodily injury claim can be astronomical.
For example, general contractors in California pay an average of $144 per month for general liability insurance, whereas those in Pennsylvania pay around $57 per month. These variations reflect regional risk factors and litigation trends, but the underlying message remains clear: liability insurance is a fundamental cost of doing business professionally.
On average, independent contractors pay about $29 per month. This translates to roughly $344 per year. When considering the potential costs of a single liability claim, these premiums represent a minimal investment in comprehensive protection.
The Licensing Advantage: Beyond Basic Compliance
Licensed contractors undergo rigorous verification processes that unlicensed competitors simply cannot match. Over 70,000 contractors are currently registered with the Bureau under HICPA. This massive database gives customers access to verified contractor information and provides a mechanism for complaint resolution.
Professional Standards and Accountability
If a contractor is licensed, it means that they have a legitimate claim to be a professional in their industry. They are making a legitimate career out of this profession, and are not simply making a quick cash grab. If a contractor holds a license for construction work, it proves that they have met certain industry standards to acquire the license and that they also maintain those standards when working a contract to uphold their license.
Licensed contractors are held to higher standards by regulatory boards, ensuring professional conduct and quality workmanship. This accountability framework provides property owners with recourse when issues arise, something that simply doesn’t exist with unlicensed operations.
The Hidden Costs of Unlicensed Contractors
While unlicensed contractors may offer attractive pricing, the true cost of their services often becomes apparent only after problems arise. It is not surprising that an unlicensed contractor would be less expensive than a licensed contractor. Unlicensed contractors have advantages that enable them to provide the lowest prices. They do not have to pay licensing fees, they do not have to obtain a bond to protect their work, and more often than not they do not purchase liability or workers compensation insurance. Without these added expenses the unlicensed contractor can provide their services at a rate lower than a legitimately licensed professional.
Workers’ Compensation Liability
One of the most significant risks property owners face when hiring unlicensed contractors involves workers’ compensation liability. If a serious injury were to occur to an unlicensed contractor the person that hired the unlicensed contractor could potentially be liable for paying the workers compensation benefits. This could turn a simple $1,000 repair into a bill for tens of thousands more.
The biggest risk involved in hiring unlicensed contractors comes down to liability. When you hire an unlicensed contractor, they actually are not a contractor at all — they are your employee. Therefore, it is actually your responsibility to provide them with a safe workplace and cover them should they be injured.
Legal Presumptions and Financial Exposure
California law provides a stark example of the legal risks associated with unlicensed contractors. Under Labor Code section 2750.5, an unlicensed contractor and their employees are presumed to be the employee of the hirer; this will eliminate the owner’s defense that he is not liable for the conduct of the independent contractor.
The hirer of an unlicensed independent contractor, who will probably fail to provide workers’ compensation insurance, is exposed to considerable risk. If the unlicensed independent contractor or its employees are injured, the hirer essentially acts as the workers’ compensation provider for the injured worker. The hirer can be sued directly; his or her negligence is assumed; and there is no defense of assumption of the risk or contributory negligence. Further, the hirer is 100 percent at fault; must pay the plaintiff’s attorney’s fees; and can have his personal property attached to pay a judgment.
The Scope of Construction Liability Risks
The construction industry faces inherent dangers that make comprehensive liability coverage essential. Unfortunately, in Ontario alone, there were 22 construction-related deaths in 2020. Though this may seem like a small number compared to other construction statistics, it is devastating for all parties involved. Therefore, a construction liability concerning death can cost a construction company millions of dollars.
Rising Costs and Nuclear Verdicts
The rise in inflation has driven up the cost of liability insurance. The costs of medical treatment and lawyers’ fees has increased the total cost of claims. Also to blame for rising liability insurance costs is social inflation driven by changes in the general population’s sentiment around settlements and verdicts.
Though the construction industry continues to struggle with labor shortages, supply chain issues, increased claim costs and uncertainty around interest rates, the market corrections of the past few years have contributed to improved insurer combined loss ratios and a more stabilized rate environment. The challenge for contractors and their broking partners is to try to counterbalance the market’s continued upward rate pressure due to inflation, litigation expense and the continued rise in nuclear verdicts with each individual account’s own loss experience and risk mitigation strategies.
Types of Liability Coverage Licensed Contractors Provide
General Liability Insurance
General liability insurance: This is the most basic type of construction site insurance for liability. General liability insurance covers claims for bodily injury, property damage, and personal injury.
California construction liability insurance protects you from various third-party claims related to your operations: Bodily Injury: Covers accidental injuries to non-employees resulting from your work, including medical costs and legal fees. Property Damage: Protects against accidental damage to third-party property caused by your business. Products and Completed Operations: Covers claims that arise after a project is finished for work performed during your policy period. Medical Payments: Pays for immediate medical expenses if someone is injured on your jobsite, typically up to $5,000. Personal and Advertising Injury: Protects against claims such as slander, libel, or copyright infringement—less common but included in standard policies.
Professional Liability Insurance
Carrying professional liability insurance is a vital step for contractors to manage risk, protect their business, and maintain client confidence. Without a properly structured PL policy, a contractor could be personally liable for any financial losses arising from claims related to design responsibility, potentially jeopardizing personal assets and financial stability. Knowing that professional liability protection is in place can provide valuable peace of mind, allowing a contractor to focus on delivering quality work without constant fear of potential lawsuits.
Workers’ Compensation Coverage
Construction businesses and contractors pay an average of $254 per month, or $3,054 per year, for workers’ compensation insurance. Workers’ comp is a key policy in construction, as workers face a high risk of injury. It helps cover medical expenses from job injuries – which your personal health insurance might exclude. It also supplies partial lost wages during recovery in the form of disability benefits.
The Real-World Impact of Contractor Licensing
Fraud Prevention and Consumer Protection
The data on contractor fraud in Pennsylvania is sobering. From 2017 to 2019, annual hail loss claims in Pennsylvania increased from 15,154 to 31,635. While many of these are legitimate, the marked increase suggests that the dishonesty of some PA contractors is reflected in the statistics.
The statistics are clear: contractor fraud is a real problem, but working with properly registered contractors and understanding your rights significantly reduces your risk.
Regulatory Oversight and Standards
Commercial licenses must have $500,000 per occurrence and $2 million aggregate insurance limits. General liability insurance helps protect you against claims related to property damage and injuries (to non-employees) caused by your business.
The Financial Consequences of Non-Compliance
Penalties for Unlicensed Operations
Felony charges are filed against anyone who illegally uses another person’s contractor license or who tries to mislead consumers into believing that he or she is a licensed contractor. Anyone who contracts for work in a state or federal natural disaster area without an active state contractor license also could face felony charges. If convicted of a felony, a person may have to serve time in state prison.
When you hire an unlicensed contractor, you are also taking on a direct financial liability. Contractors themselves can face fines and penalties that range between $500 and $5,000 if they’re caught performing a job for which they don’t have a license.
Property Value and Insurance Implications
Ideally, a licensed contractor’s liability insurance would pay for the damage in such a case, but if they don’t have liability insurance, your homeowner’s insurance policy should cover any repairs needed. You’ll have a big problem if you hired an unlicensed contractor because your home insurer is unlikely to pay you once they discover the contractor was responsible for the property damage. Most homeowner insurance policies stipulate that only authorized contractors be used for home improvements or repairs. Therefore, again, because of dealing with an unlicensed contractor, you may be facing a hefty financial expense to fix the water damage, potentially straining your finances.
Defensive Benefits of Professional Liability Coverage
One of the greatest values of having a PL policy is the defense it provides against a claim—even if the claim has no merit. Anecdotal evidence from industry attorneys suggests that when a client or third party is aware that a company has a policy with a robust defense obligation, they are less likely to bring a baseless, inconsequential, or vindictive claim against a contractor. Not every professional liability claim brought against a contractor triggers a recovery; the ability to fight against a claim leads to many claims being withdrawn.
Market Trends and Future Outlook
The construction insurance marketplace is increasingly competitive — and likely will continue to be through 2024 — due in part to an influx of new entrants into the construction insurance space.
As construction companies navigate the dynamic landscape of the industry in 2024, effectively managing liability risks is of paramount importance. As one of the Top 100 Brokers, Bowen, Miclette & Britt Insurance Agency, LLC can help find the right insurance for construction companies.
Making the Smart Choice: Licensed vs. Unlicensed Contractors
Quality Assurance and Long-term Value
While unlicensed contractors may seem appealing due to lower costs, the risks far outweigh the benefits. Hiring a licensed contractor ensures compliance, quality, and peace of mind.
Protection Against Multiple Risk Factors
Unfortunately, the reason they may cost less is at least in part because unlicensed contractors typically avoid the expense of obtaining the proper licensing and liability insurance required to work in a certain state. This can leave a homeowner open to liability for legal issues and resulting financial losses. Therefore, it is strongly recommended that a person only hire licensed, bonded, and insured contractors to perform work on their home. This ensures that the property owner and other parties are protected from most of the legal risks and financial losses they could face because of a contractor’s mistake.
Cost-Benefit Analysis: The True Value of Licensed Crews
When evaluating the cost of hiring licensed contractors versus unlicensed alternatives, it’s essential to consider the comprehensive protection that licensing provides. If you’re a contractor working in the Sunshine State, you can expect to pay anywhere from $500 to $800 per year for general liability insurance, depending on the specifics of your business. This cost is a small price to pay for peace of mind and essential protection.
Liability insurance for a 1099 independent contractor typically costs around $29 per month or $344 per year. When combined with other policies, like commercial property insurance in a Business Owner’s Policy (BOP), the average cost is about $42 per month or $500 annually.
Conclusion: The Clear Choice for Property Protection
The evidence overwhelmingly supports the necessity of working with licensed contractors who carry comprehensive liability insurance. From workers’ compensation coverage to professional liability protection, licensed crews provide a safety net that protects property owners from potentially devastating financial and legal consequences.
The modest cost of proper insurance and licensing—ranging from a few hundred to a few thousand dollars annually—pales in comparison to the potential costs of a single uninsured liability claim, which can easily reach tens of thousands or even hundreds of thousands of dollars.
These financial damages can amount to thousands of dollars, far more than the initial savings you thought you were getting by using an unlicensed contractor.
By choosing licensed contractors with proper insurance coverage, property owners invest not only in quality workmanship but also in comprehensive protection that preserves their financial security and peace of mind. In an industry where risks are inherent and consequences can be severe, the choice is clear: licensed crews don’t just provide better service—they provide essential liability protection that unlicensed alternatives simply cannot match.
References
- PIA Insurance Agency – Contractor General Liability Insurance Cost
- Schneider Insurance – How Much to Obtain General Liability Insurance for Contractors
- BMB Insurance – 2024 Construction Industry Outlook
- ECHO – The Dangers of Hiring Unlicensed Contractors
- EZ CleanUp – What the PA Contractor’s License Signifies for Customers
