Importance of proper contractor's coverage

[Richard F.]

True Story:

A former employer recently e-mailed me with details of a situation that I find quite disturbing. He was managing Broker for a mid-sized Property Management and Investor Real Estate Sales company.

It seems one of his admin employees owns several investment properties, and in fact the PM company "managed" these, from the standpoint of tenant management and routine service calls. (This is typical of arrangements with company owners/employees that also own rentals. It is done in large part to simplify the recordkeeping, and distance the true owner from the tenants.) A standard "management agreement" is in place, usually, although not always, with a reduced management fee.

One of the properties this gentleman owned was in need of a new roof. The owner obtained bids from contractors the PM company normally used, and accepted one of them. He signed personally, NOT as the PM company, and had the work performed. He paid the contractor via personal funds, not through the PM account.

Unfortunately, one of the workers was injured during the project. This worker was a SUBcontractor to the original roofer. The roofer did not have workers comp coverage (only liability coverage), so the sub sued and got a judgment against the roofer. Roofer filed bankruptcy. Sub then filed suit against the property owner, and then against the owner's employer...the PM company, since THEY do have worker's comp coverage.

The PM's insurance carrier is defending the case, BUT they had to post a reserve in excess of half a million dollars in case they lose, AND, they are canceling the insurance for the PM. For another carrier to pick up this coverage will no doubt be VERY costly, IF anyone will even touch it prior to settlement. In other words, the PM could be out of business!

Be certain your vendors have current Workers Comp!