THE DANGERS OF USING UNLICENSED AND UNINSURED CONTRACTORS

By Stanley Feldsott

“Save the Association $1,000 – No One Remembers

Cost the Association $500 – No One Forgets.”

          I like to think that in the year 2020 that most HOA attorneys would not advise an association to use an unlicensed or uninsured contractor. Though attorneys are known to disagree with one another on a number of issues, this is one of those rare topics where there seems to be a general consensus. That is, hiring unlicensed or uninsured contractors is never a good idea.

It’s easy to think that you would never hire an unlicensed contractor but it gets tempting. It’s hard to turn down a discount that could save your HOA hundreds, even thousands of dollars.

Remember, hiring a licensed contractor doesn’t mean the contractor will do a good job. Similarly, hiring an unlicensed contractor doesn’t mean the contractor will do a bad job.  It’s about the safeguards and remedies that come with the license that protects both the contractor and the HOA. It also means the contractor demonstrates some minimum standard of knowledge in his or her particular field.

For starters, a licensed contractor has to pass a comprehensive test and is regulated by the contractor’s licensing board.  The board regulates contractors and protects consumers from, among other things, poor workmanship, abandonment of a project, and building code violations. Most licensing boards, including California, require workers’ compensation insurance and a contractor’s bond ($15,000 in California) before a contractor can be issued an active license. The bond is filed and protects consumers against damages resulting from defective construction or other license law violations.

            A licensed contractor might cost a little more but the protections are worth the investment in the long run. For instance, if you are ever dissatisfied with a licensed contractor’s work, you can file a complaint and the board will investigate the claim and find a suitable remedy. Too many complaints and the contractor could lose his or her license.

Not only is hiring an unlicensed contractor a bad idea, it’s actually against the law in California for an unlicensed contractor to work on any construction project totaling $500 or more (Business and Professions Code §7048). Because of public safety concerns, HOAs are also at risk of potential lawsuits in the event of an injury caused by an unlicensed contractor’s work.

That’s why having adequate insurance is also crucial. The insurance held by an HOA might cover some liability but insurance is really a cost the contractor should bear. It is important that the contractor has liability, property damage, and workers’ compensation insurance (if required). If not, the HOA could be liable for damages caused by the contractor.

For example, one HOA I represented hired an unlicensed and uninsured contractor to perform electrical maintenance and repairs at the HOA’s property. The HOA later learned that the contractor was not licensed, did not get the necessary permits, and that the work was not ADA or code compliant.

As a result, the HOA had to hire a licensed contractor to redo all of the work. If the HOA had hired a licensed and insured contractor in the first place, the HOA could have filed a claim with the licensing board and the damages could have been covered by the contractor’s insurance. Instead, the HOA was forced to pay for the damages.

Lastly, imagine if the electrical work performed by the unlicensed and uninsured contractor caused a fire. Property loss, injuries, and even death could have occurred. The HOA would be liable for not exercising its due diligence in finding a licensed and insured contractor.

Remember, the members of the board of directors of an HOA are fiduciaries, trustees of the HOA’s funds. In California, a contractor’s employees have the ability to sue a person or entity “where the person or entity knows or should know that the contract or agreement does not include funds sufficient to allow the contractor to comply with all applicable local, state and federal laws and regulations governing the labor or services to be provided” (Labor Code §2810 [form attached]). For this reason, it’s important to take the time to research contractors and find one with a license, insurance, and the wherewithal to complete the job.

Hiring a contractor can be a challenge but it’s crucial to understand all the benefits of hiring the right contractor, one that is licensed and insured. There is too much liability on the line. You could always save a few bucks by hiring an unlicensed and uninsured contractor, but you may end up spending far more in the long run. Have your attorney review all contracts before signing off with a contractor. If you make the right decisions early, you won’t have regrets later.