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Bonds and Insurance for Contractors: Why Most Homeowners Won’t be Protected

By December 27, 2018No Comments

Many homeowners feel much safer having work done on their house by contractors that are registered, insured, and bonded. But how valuable are these bonds and insurance? Will they actually compensate a homeowner if a contractor does a bad job? The answers: Not very, and probably not.

Construction workers inside of a building with the framework showing

Let’s talk about bonds first. In most Ohio municipalities, a contractor needs to be registered with the municipality (or sometimes on the county level) in order to perform any work on a residence. This usually requires proof of insurance and purchase of a municipality-approved performance bond. But when a contractor says they are “bonded”, homeowners might tend to think that they are the beneficiary under the bond if the contractor fails to complete their work or causes damage to the property. In the majority of cases, they are not. Instead, the payee under the bond is the municipality itself. The homeowner is out of luck.

But let’s assume that you’re one of the lucky homeowners whose municipalities have language in their bonds that benefits residents of that municipality. Are you protected now from a contractor who damages your property? Still, probably not. For one, the bond is not going to be “per instance” of negligence. Instead, a homeowner shares the total value of the bond with every other homeowner that has also made a claim over the course of a year. Has the bond that you’re making a claim on already been drained by a previous claim? There is really no way for a homeowner to know until they make the claim themselves.

But even if there is still money in the bond, that doesn’t mean that the bonding company is going to pay out. In most cases, a contractor and a bonding agency will have signed an indemnity agreement in which the contractor agrees to pay to the bonding agency any money paid out by the bond. In the alternative, the contractor can agree to assume the defense of the bonding company and provide a defense for the surety. Again, you’ve lost access to the bond that should have paid out to you.

So if the bond likely isn’t going to compensate a homeowner, what about insurance in case the contractor makes a mistake? Again, the homeowner is probably out of luck. A recent series of cases from the Ohio Supreme Court have stated unequivocally that the definition of an “occurrence” under a general liability policy is “an accident, including continuous or repeated exposure to substantially the same and general harmful conditions.” [Ohio Northern University v. Charles Construction Services, Inc., et al., 2018-Ohio-4057 (Oct. 9, 2018), reaffirming Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St. 3d 476, 2012-Ohio-4712]. What does that mean for a homeowner? It means the insurance company doesn’t have to pay anything if the contractor does bad work on their house unless the work was “accidental”. The court won’t determine that generally bad workmanship is “accidental”, meaning that no “occurrence” took place, meaning no insurance coverage.

Fixes to both of these problems will have to come from the legislature and from a homeowner’s municipality to ensure that these documents are worth the paper they’re printed on. Until then, homeowners have to be careful about which contractors they hire to do work, and they can’t rely on statements that the contractors are “bonded and insured” to determine whether the homeowner has a chance of recovery if a contractor fails to complete a project.

 

This article is meant to be utilized as a general guideline for the hiring of contractors by homeowners. Nothing in this blog is intended to create an attorney-client relationship or to provide legal advice on which you should rely without talking to your own retained attorney first.  If you have questions about your particular legal situation, you should contact a legal professional.

 Nick Weiss of The Gertsburg Law Firm can be reached at 440-528-1233 or [email protected].

 

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