There is always work to be done on a building, whether it’s a simple lobby repair or a major capital improvement, but finding the right contractor for the job takes some work. If the vetting process is not done properly, the results could be disastrous.
What if the contractor’s license is expired or that the manager also finds out that the contractor doesn't have the proper insurance coverage. This could leave the building open to massive liability if something should go wrong in the course of the project. It’s looking at those small details that could be the difference between hiring a qualified contractor who can complete a job properly and has the right documentation, and hiring an inept, unqualified contractor that could cause significant trouble for the building.
Trust But Verify
Michael Crespo, president of Manhattan-based Citadel Property Management Corp., understands the importance of vetting a contractor before a job begins. “As the property manager, we take on the responsibility of verifying contractors’ credentials,” says Crespo, who is a licensed real estate broker and a New York Accredited Realty Manager. “There are some cases where active, hands-on board members will involve themselves in this process to build confidence in their selected contractor, but essentially the responsibility lies with the property manager as it’s typically a management responsibility as per the contract.”
Wanting to move quickly on a capital improvement project, the board of one of his buildings had approved a contractor without doing the necessary background checks. Crespo insisted that the vendor get checked out before the job began. It didn’t take long to discover that not everything was in order. “The contractor’s license had newly expired and, upon further scrutiny, it was revealed that he was not even licensed to perform work in the county,” he says.
Interestingly, this contractor that the board hastily hired received rave reviews regarding the quality of the work that had been completed, but the board failed to check out that work too. “Had we gone solely based on the recommendation we received, we would have been very disappointed,” says Crespo. “It just took a quick trip to one of their previous jobs to know they did not have the skills to perform a quality job that our clients expect.”
Crespo stopped the job before it even began, but the surprises weren’t over. “We found that they only just obtained the proper coverage to be able to complete a job of the size and scope that we were looking to complete,” he says. “Not only did this mean that the contractor didn’t have the proper insurance coverage before, but he had never worked on a job of that size before either. This is something we never would have known unless someone was looking at the small details.”
Do Your Due Diligence
It’s looking at those small details that could be the difference between hiring a qualified contractor who can complete a job properly and has the right documentation, and hiring an inept, unqualified contractor that could cause significant trouble for the building.
“For example, the use of an uninsured contractor could cause tremendous financial hardship to the building,” says Stewart Wurtzel, Esq., a partner with the Manhattan-based law firm of Tane Waterman & Wurtzel, P.C. in New York. “It is also conceivable that if a contractor with a checkered past is brought onto the premises and causes damage that might have been avoidable had any due diligence been performed before contracting, the board and its agents potentially could be subject to a claim akin to that of a negligent hiring or negligent supervision claim of an employee.”
The New York City Department of Buildings (DOB) issues many of the trade licenses, but Wurtzel says that the responsibility to examine and verify a contractor’s license and other credentials on a building’s behalf falls on management.
“Any time a request for an alteration is submitted or if the board is undertaking a building-wide project, licenses should be checked,” he said. “If there is an architect, engineer or project manager supervising a larger job for a building, they should also be checking the licenses and the insurance. The building’s attorney should also review the insurance documentation. The issuance of a license can be checked online in many instances and copies of all licenses can readily be submitted with the contract.”
Wurtzel also cautions that any work on a system that requires a licensed contractor - i.e., plumbing or electrical - should only be performed by licensed contractors.
Crespo says that he not only wants to see that the contractor’s license is active, but that it will remain so throughout the period needed to complete the job. “It’s also required that the license is applicable in the state and county in which the job is being performed,” he says.
When Peter Lehr needs to hire a contractor, he follows a regular routine to make sure the contractor fits what the building needs. “We see the work that he’s done and check out the references,” says the director of management at Kaled Management Corp. in Westbury. “I also want to make sure what he envisions the project to be. Finally, we make sure the paperwork is all in order and that the insurance is in place.”
If the contractor does not have a history of working with the building or the agent, check their references. “You should specifically ask for a reference where there was a problem with a job so you can ascertain how the issue was resolved and how the contractor was to work with when problems arose,” says Wurtzel. “Court filings can also be checked to see if there is a history of litigation involving the contractor as well.”
Next, make sure that the contractor shows you their insurance coverage. The declaration page of the contractor’s insurance policy will explain what type of coverages the contractor has, including such information as the name of the insured or insured party; the location of the property insured; the value and replacement value of property insured; the inception and expiration date of the policy period; amounts and limits of insurance coverage; deductibles; and the premium amount.
For Lehr, having documentation of insurance is a non-negotiable requirement. “I don’t want to see insurance for a half-million dollars, it has to be a million dollar policy, and an umbrella of five million would be perfect. But if they aren’t insured properly they aren’t stepping foot into our buildings.”
Whenever consent is required before work can commence, the building and the managing agent should also be added as additional insureds. “If there is a loss, the claim can be submitted directly to the contractor’s carrier,” says Wurtzel.
Know Your Risks
According to Jason Schiciano, president of Levitt-Fuirst Associates and Risk Reduction Services in Yonkers, a qualified insurance agent should be willing and able to review what are known as “risk transfer” documents, which consist of both a properly worded and formatted certificate of insurance, as well as the indemnification agreement between the contractor, the building and the managing agent. “And for major construction jobs on a building, the association’s insurance broker should also be willing and able to vet the quality of the contractor’s insurance,” he adds. “If the risk transfer documentation is not in proper order or was not obtained, the insurance claim exposure for a contractor’s work that results in bodily harm or property damage can fall back onto the building, affecting insurance periods for years to come.”
Also, note that it is the responsibility of the general contractor to make sure that any subcontractor hired is properly licensed and insured. “But this is an area where everyone is going to want to work together to make sure all the documents are as required and all bases are covered,” says Crespo. “If it’s determined after a loss that a sub has not been properly licensed or insured, the insurance company will likely turn their back on the general contractor and drop coverage creating a huge potential liability for the general contractor and the property owners to deal with.”
From a legal perspective, Wurtzel explains that the failure to use a properly licensed or insured subcontractor would be a breach of contract if the agreement was properly drafted and would allow for termination of the contract if proper subcontractors are not brought in to finish the job. “In addition, if feasible, the owner can bar a subcontractor who is not insured or licensed from the premises,” he says.
Of course, it begs the question as to why an uninsured or unlicensed contractor or subcontractor would even get hired in the first place. “Oftentimes, a contractor is really just unaware as to exactly what kind of insurance they need and what the coverage terms of that insurance are; they’re just signing a contract because they need the work,” says Schiciano. “And sometimes they don’t even know that they’re not meeting the insurance requirements until the contract has been signed, they submit the insurance paperwork, and there are deficiencies. This is why these issues need to be addressed early on in the project planning stages.”
“If insurance is not renewed or a license revoked, the contract should provide for a building to be able to terminate the contractors in those instances,” adds Wurtzel. “In some cases, the owner may be able to purchase the insurance on the contractor’s behalf and deduct the premium cost from monies owed to the contractor. Past histories or labor disputes cannot serve as the basis for termination of a current contract if the contractor is not engaged in the same practices on these jobs. If these are concerns, you must try to vet these issues before you sign the contract.”
If there was an educated, business related reason for hiring an unlicensed or uninsured contractor, there may not be any liability. “If, however, regulations only authorize certain work to be performed by a licensed contractor, the failure to use one could result in liability if the contractor’s failure to have a license was the proximate cause of any damage,” he says.
If you’ve done your vetting process and thoroughly checked your potential contractor’s documentation, references and examples of their work, the odds of a problem occurring will be much lower.
“However, if it is found at a later point in time that there is an issue with either insurance or licensing, our first line of defense would be to halt the process on the job until these items are produced and verified,” says Crespo. “If there’s an issue with obtaining either one of these in a timely manner to complete the job we would then explore the possibility of terminating the contract for cause.”
“It’s not worth the risk involved or the potential ramifications that are likely to develop as a result of hiring someone who doesn’t have insurance,” he says. “The damage to a party could virtually be unlimited. The board and management could open themselves up to tremendous liability and safety risks, not to mention lawsuits. This is a management responsibility and vetting a contractor must be done, and under no circumstances should an unlicensed, uninsured contractor be allowed to do any work on your property, period.”
However, at the end of the day, it is ultimately the board’s decision. “They make the decision based upon as much information as they get from management,” says Lehr. “We have specific knowledge and experience and we have to do our due diligence and advise the board on the right thing to do.”
Lisa Iannucci is a freelance writer and a frequent contributor to The Cooperator.