The Perils of Associations Using Unlicensed Contractors

Here's one of those issues that keeps turning up like a bad penny: the use of unlicensed, unbounded, and uninsured contractors on association projects and properties. Sometimes it's a matter of ignorance or laziness on the part of association managers or board members who should know better. Sometimes it's a matter of a board member or manager routing business to a friend, relative, or someone willing to provide a kickback in exchange for the work.

Regardless of the reason, using unlicensed contractors is a bad idea. Part of the fiduciary and oversight duties of any condominium or HOA board of directors is to ensure all projects done under their auspices are executed by licensed and bonded contractors, and that the work is done in accordance with the proper permitting procedures.

Why You Shouldn't Use Unlicensed Contractors

Unlicensed contractors generally don't carry the vital forms of insurance that exist to protect consumers, and by extension, the homeowners in your community.

Example: Repair Goes Wrong and Gets Expensive & Litigious

Imagine you bring in an unlicensed contractor for some rain gutter repairs. It's a minor job, and you expect no complications. Your association manager recommends the repair and further recommends a contractor they're familiar with to do the contracting. The price looks a little steep, and a board member mentions they have a buddy at a difference place who can do the work for much less.

The board approves the lower bid, and their crew show up to do the repair. All seems to be going well, but one of the workers, falls off a ladder and wrenches his back. He now has an insurance claim.

The worker can't work with an injured back, and he's got some medical bills. So he files a workers' compensation claim against his employer. But the contractor company is not a licensed contractor: They aren't carrying the required workers' compensation coverage. The worker may or may not have individual health insurance in place, but it's not supposed to cover workplace claims.

Eventually, the worker's lawyer advises him to file suit. But not against the contractor company. They know company has no money and no assets they could collect against. Without insurance, a judgment to collect would be worthless. So, who's got the deep pockets in this case? Your condo or homeowners' association.

How Using an Unlicensed Contractor Could Impact You or Your HOA

If you don't hire a licensed, bonded, and street-legal contractor, and something goes wrong, you are going to be in the line of fire. Because your HOA represents, and is entirely composed of, the owners in your complex, your owners are the ones who will be left with the liability.

Your HOA could be forced to issue a special assessment to pay this worker's medical bills and compensation for lost wages—maybe for years—because your board of directors failed to perform oversight and insist all work be done by licensed and bonded contractors with all requisite insurance protection in place.

If your board or management company allows the use of an unlicensed contractor, and a worker gets hurt, you can expect courts to hold your association and management property jointly liable as employers.

Your risk isn't limited to workplace injuries, either. If you get cheap and hire unlicensed contractors, and the workmanship is deficient, or if one of your tenants or residents is hurt because a roof or deck collapsed, you'll have no recourse against the contractor. If they don't have workers compensation insurance, they probably won't carry contractors' liability insurance either.

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Minimum Due Diligence for Contractors

At a minimum, before you authorize any third-party contractor to do any task, you should ensure that either your board of directors or your property manager carries out the following due diligence:

• Get the state contractors' license number
• Verify with state officials that the license number is valid
• Make checks payable to LLCs and corporations, not to individuals
• Don't pay huge deposits up front (escrow is normally fine, or materials charges)
• Get proof of insurance—both workers compensation and contractors' liability insurance
• For larger projects, you may ask the contractor to put up a "completion bond," or "surety bond," which pays your association in the event the contractor can't or won't complete the project according to contract
• Put contracts in writing
• Have the contractor obtain necessary permits and show them to the board's representative. Sure, the association can get the permits, but they won't be granted without insurance in place. This is a useful reality check to screen out unlicensed and irresponsible contractors, while also limiting the association's liability.

Limit Your Liability: Don't Use Unlicensed Contractors

If the association gets sued, association members could have an opening to sue incompetent or corrupt board members who use unlicensed contractors for projects over a specific amount established by law (usually about $500 depending on the state).

As a board member, you have a fiduciary duty to act with reasonable prudence. If your association is damaged because of liability incurred because you failed to perform ordinary due diligence to see if a contractor is even licensed, you could be sued for violating your fiduciary duty as well. This could be a covered claim under directors & officers' liability insurance, but if you're a board member, you don't want to be in that position.

The obvious lesson here is always, always use properly licensed, bonded, and insured contractors.