Why Financial Background Checks Are Important
Good credit is one sign of a company's financial health and stability. You can talk with subcontractors and suppliers regularly used by the contractor. Ask if the contractor paid them on time. Ask if they've had any problems dealing with the contractor or if they feel the contractor's credit is good. If a subcontractor or supplier reports any problems with the contractor, you may want to think twice before hiring the contractor.
Insurance
If a contractor fails to pay the subcontractors and suppliers, they could go to court to force you to pay for any unpaid bills from your project, possibly even forcing you to sell your home. One way to protect yourself from this action is to ask the contractor and every subcontractor and supplier for a lien release or a lien waiver. For more information on liens, ask a local consumer agency for an explanation of lien laws in your area.
If a contractor does not have the appropriate insurance, you may be held liable for any injuries or damages that occur during the project. General liability insurance, worker's compensation and property damage coverage are particularly important. If workers are injured on the job, the contractor's insurance will cover their injuries, and you won't be held liable. Insuring your project can provide safeguards not only to prevent liability but also to protect you against errors and omissions and breaches of warranties. For example, without insurance, if the service professional orders supplies and fails to pay for them, you will have to pay the bill to the suppliers even if you've already paid the service professional for the supplies.
Homeowner's insurance may provide further protection. Read your homeowner's policy carefully or ask your insurance agent. If faulty workmanship leads to problems, your homeowner's policy may not cover damages.
After signing a contract, contractors should notify their insurance agents and have an insurance certificate mailed to you. The certificate will show active insurance for that contractor.
Bonding
A bond provides additional protection to a homeowner. To obtain a license, some states require that contractors post a bond. A bond is basically a piece of paper a contractor buys from a bond company that is worth a specific amount of money. If a contractor fails to complete a job, a homeowner can turn to the bond company and attempt to collect the bond fee due to nonperformance.
In addition, a homeowner who sues a licensed contractor for faulty work can sue the bond company. This is particularly helpful in cases where the contractor is insolvent or has gone out of business.
Although a bond may only provide minor financial protection (many states have minimum amounts for bonds, such as $5,000), it is still another avenue homeowners have for financial protection if things go wrong.
If a contractor is not bonded and abandons a job, the homeowner may not be able to recover any expenses.
by Leticia Stefens, reprinted courtesy of HomeAdvisor.com