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Here’s the scenario: A homeowner looking to replace his roof solicits estimates from several roofing companies. The company he hires is the least expensive one and uses subcontractors to do the labor. The salesperson for that company shows him the company’s state license and current certificates of insurance, including workers' compensation insurance. In the course of the work, a crewmember falls and is severely injured. The worker on the roof is a subcontractor and a sole proprietor without worker’s compensation, and it turns out that the license and insurance certificates the roofing company showed the homeowner only cover the company's employees, meaning admin staff and salespeople. The injured worker files a personal injury lawsuit against the homeowner seeking payment for medical expenses and lost wages.

No Mere Formality

 Sound far-fetched? Don’t kid yourself. It happens, though such suits rarely if ever are reported in the media. It’s why, when selling a job, reputable contracting companies routinely present proof that they hold insurances in addition to their contractor’s license (in states where it’s required), as well as proof of bonding. Online review sites advise homeowners that they need to ask for a license and proof of insurance coverage, meaning for liability and workers' compensation. 

For instance, a story on Angie’s List quotes Oregon painting contractor Eric Hernanz, who had an employee fall off a ladder, resulting in a broken elbow and an $18,000 bill for treatment. Hernanz had his Oregon contractor’s license and was up to date on his workers' compensation insurance, which paid the bill. But what if he hadn’t been? “My employee very well could have sued the homeowner for medical bills and lost wages since it happened on his property,” Hernanz points out. “Unlicensed contractors put their own clients at risk if someone’s injured on the job.” 

But whether or not a homeowner is going to be stuck paying the bills is far from an open and shut matter. A host of factors are at play, which may be why so many contractors choose to take that risk.

Licensing and Workers’ Comp

 Can the homeowner be sued? According to a blogger for the Simplified Safety website, the answer is: “It depends.”

Here’s what it depends on. First off, it depends on whether or not the contractor carries workers' compensation insurance, which would be the first recourse in the event of an injury. The worker’s medical expenses—typically about 60 percent of the total payout—and back wages are paid by the insurer, in amounts averaging six figures. And the worker in turn forfeits the right to sue his employer.

If a contractor is licensed, he likely has workers' compensation, because in states that require licensing, proof of workers’ comp insurance would be needed to get or maintain that license. In California, for instance, “workers' compensation insurance is required for issuance of an active license, reactivation of an inactive license, and for the maintenance of an actively renewed license, unless the licensee does not employ anyone in a manner that is subject to California workers' compensation laws,” according to the website of the California Contractors State License Board (CSLB).

California is one of the strictest states when it comes to licensing and insurance, with tough laws. According to a story on the Law360 website, a year and a half ago the Golden State stepped up its enforcement of workers’ compensation requirements by enabling CSLB Enforcement Representatives (ERs) “to issue a Notice to Appear in a California superior court enforcing a licensee’s obligation to secure valid and current workers’ comp insurance ….” Contractors holding a license who have allowed their workers' comp insurance to expire are the clear target.

What About Subcontractors?

 Then there’s the subcontractor part. Every state except Texas requires contractors with one or more employees to purchase workers’ compensation insurance. (A list at GTM Payroll Services provides a state-by-state description of workers’ comp requirements.) Sole proprietors are excepted, but if the independent contractors who install have one or more employees, they’re certainly not excepted. 

In roofing, installation with subcontractor crews is more the rule than the exception. And many subcontractors don’t carry workers’ compensation insurance. “Because the workers’ comp premiums are so high, the subs in turn subcontract out their labor,” explains the website for Kovalick Roofing, in Michigan. “By the time it gets down to it, everyone on the roof is a sole proprietor with no employees. All of whom are exempt from the workers’ compensation laws, and therefore have no insurance.” 

Unless the general contractor demands proof of current insurance from whoever is fielding those crews, the homeowner is exposed to risk. It doesn’t do the homeowner much good that the roofing company’s salespeople and admin staff are covered by workers’ comp, because those employees are not on the roof. Should a roofing installer fall, the likeliest answer to the question of who’s going to pay for it is the party with assets.

The issue of responsibility has been fought out in the courts, but there is still no clarity. The California State Supreme Court handed down a major decision on this issue in “Fernandez vs. Lawson” in 2003. In that case an injured worker employed by a contractor who lied to a homeowner about having both a license and workers’ comp sued that homeowner. A court initially found the homeowner liable, but the State Supreme Court “reversed the decision, but only because the worker had worked on site less than 53 hours. Attorney Peter N. Brewer notes that it is the responsibility of the owner of a business or residence to determine that the contractor is licensed and carries adequate insurance.” 

My Insurance Will Cover It

 What the typical homeowner wants to know on signing a contract is how much is it, and when can you start?  Most are not aware that they may be legally responsible for costs associated with an injured subcontractor, and even those who do know don’t always properly investigate their liability. They can ask the roofer, and he can show his license and proof of insurance. But would the homeowner know to ask about whether or not subcontractor crews are fully insured? 

For on-the-ball roofing companies, the issue of who’s legally responsible in the event of an onsite injury can be an opportunity to educate, and to position themselves as knowledgeable, honest, and forthright., And it can help them explain price differences when compared with their competitors. One reason so many contractors go unlicensed and fail to purchase workers’ compensation insurance is the sky-high cost of that insurance. In Florida, for example, workers’ comp costs $8,528 per year for a $40,000 roofing employee. Not carrying workers’ comp enables subs to reduce their labor costs and submit more competitive, low-ball bids. 

Homeowners may even be aware that that super-low price for a re-roof means that no one pounding nails is actually covered by workers’ comp. And they may not care or may be willing to take the risk to save a few thousand dollars on their re-shingling job. They may also take refuge in the idea that “my homeowners insurance will cover it” should an accident or injury occur. 

Are they right? Again, maybe, maybe not. “In some instances, a homeowners insurance policy may protect against personal injury liability,” notes attorney Daniel Taylor in an article at FindLaw.com. But few homeowners know what their homeowners insurance actually covers. They probably wouldn’t know, without examining the policy, whether or not liability has been extended to cover personal injury. 

On the other hand, attorney David Goguen, writing on personalinjurylawyer.com, notes that “in some cases, a homeowner may be held liable for injuries suffered by contractors and other workers who are on the property to perform renovations, repairs, and other kinds of work. But homeowner liability in these situations is not automatic.”

What comes into play in determining if the homeowner could be liable, the article points out, is how much control the homeowner has over the contractor and the job, the specifics in the homeowner’s insurance policy, and whether or not “the injured worker is eligible to file a workers’ compensation claim.”

Minimize Customer Exposure

For some homeowners thinking about buying a job from your company, the thought that there are certain circumstances in which they could be held legally responsible and sued for medical treatment and lost wages is a scary one. That’s what makes proof of insurance a card you can play when bidding against low-ball contractors whom you suspect of being unlicensed and uninsured or of using subs who are uninsured.

Georgia roofing, siding, and window contractor Exovations advises homeowners interviewing contractors for a job to ask for the name and number of the company’s insurance agent, then follow up with a call. At Small Business Chronicle, attorney Van Thompson similarly suggests to homeowners that “with the contractor's permission, you can call the insurance company to verify that the policy isn't a forgery and is up to date. Use that opportunity to ask any questions you might have about the contractor's coverage.”

That coverage may be on the up-and-up, but what about the subs he’s using to install? Since in many cases that’s where the risk is, shouldn’t the homeowner see their proof of insurance as well? The best solution is to have that proof right where you need it: in the subcontractor agreement. And if you install with subs and use the same independent contractors year after year, “make it a habit to ask for current certificates of insurance,” advises an article at Contractorsinsurance.biz.  “Make sure you are named as an additional insured. Also check that his limits of liability match yours.”