If you're building a new home or doing a major renovation of your current house, you'll probably hire a licensed contractor. There are good reasons for doing this, but one of them -- that a licensed contractor must be insured -- isn't as good a reason as you might think. The required insurance coverage is limited. One area it generally doesn't cover is poor workmanship.
General Liability Insurance
In most states, a licensed contractor must carry general liability insurance. In some states, the contractor must also be bonded. The coverage for contractors' mandatory general liability insurance excludes poor workmanship. For example, if the contractor does a terrible job setting the tiles in your new kitchen, and they start falling out, his liability insurance doesn't cover that. Your homeowners insurance doesn't cover it either. Bad workmanship isn't covered under any policy you or your contractor is likely to have. Either your contractor agrees to repair it at his expense, or you'll have to pay someone else to redo the work, then sue the original contractor for the cost of repairs. In some circumstances, you may recover from the bond company, but it's usually hard to do. Mandatory bond amounts are generally low, for one thing -- $12,500 in California, for example -- and the premiums are inexpensive, which means some bond companies routinely fight claims to keep down costs.
Optional Coverage
The contractor can obtain additional, optional insurance that covers bad workmanship. It's called "product and completed operations coverage," but few residential contractors carry it. If you tell the contractor you want this coverage while you're negotiating the contract, you may persuade him to get it. If not, consider offering to pay some or even all of the cost yourself.
Injuries
If your contractor's poor workmanship leads to an injury, the injury may be covered, but not the underlying bad workmanship that caused it. For instance, if the contractor installs a new floor with a board sticking up and a guest trips on it and breaks his wrist, the contractor's liability insurance covers his injuries, but not the floor repair. If a contractor's employee is injured while working on your home, the contractor's liability insurance doesn't cover it. The contractor must carry a separate workers' compensation policy.
Consequential Damage
Required liability insurance may include other surprising coverage exceptions. For instance, if your contractor's bad foundation work eventually causes a patio to collapse, the liability insurance won't cover the bad foundation work, and may or may not cover the patio, depending on who built it. If the same contractor built the patio, under most liability coverage, the patio damage is excluded as "consequential damage" caused by poor workmanship in the construction of the foundation.
