One of the first principles of gambling is this: Never take a risk you can't afford to lose. Or, as Warren Buffett once said of an investment that went spectacularly wrong: "Never risk what you have and need for what you don't have and don't need."
When you hire an unlicensed contractor to do work on your property, or you fail to secure the necessary permits for that work, you are doing just that.
Here's why: When a general contractor takes on a job, they'll hand off parts of it to one or more subcontractors. But the general contractor has overall responsibility for legal compliance, safety, quality of workmanship, and just about everything else that happens on the job site.
General contractors therefore take on a ton of responsibility. With that comes an equal measure of potential liability. That's why licensed and responsible general contractors carry a lot of insurance, from contractors' liability insurance to workers compensation insurance.
All these different forms of insurance coverage ultimately protect the customer if things don't go according to plan. In fact, states generally won't even issue a contractor's license if the minimum level of insurance isn't in place.
All subcontractors will either have their own insurance or they'll be operating under the general contractor's license and insurance coverage. Either way, you as the customer will enjoy a substantial level of protection simply by virtue of using a licensed and bonded contractor. Their insurance protects you from having to bear the financial consequences of a job gone wrong, or a workplace injury, but only as long as you use their services.
Many things can go wrong on a construction job, from injuries to shoddy workmanship to destruction of power, sewer or water lines. Ultimately, all issues are the responsibility of the general contractor. The general contractor and their insurance carriers are the primary payers in the event something goes awry on the job.
Now here's the dirty little secret: If you don't hire a licensed and insured contractor to handle your project, you're the general contractor!
If your unlicensed contractor breaks a sewer line, you're responsible. If a worker gets hurt and can't work for two years, and there's no workers compensation coverage in place, you are on the hook for that workers' medical bills and lost wages.
What's more, your standard homeowners insurance or landlord liability insurance isn't going to cover you for these events. Most of these policies exempt damage caused by the knowing use of illegal or unlicensed contractors.
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Landlords should be very wary of property management companies that make use of unlicensed or uninsured contractors. When they do, they are potentially putting you at risk, too.
If your property manager brings in an unlicensed or uninsured contractor, and something goes wrong, courts have generally held the property owner liable along with the property manager.
Hiring friends as contractors doesn't make the liability and risk issues go away. Everyone can enter an arrangement with the best of intentions, but when your buddy falls off the ladder and files a claim with their insurance company, they may well pay the claim and then go after you in subrogation proceedings (the area of law in which insurance companies fight to get reimbursed after paying their customers' claims).
In one California case, Mendoza v. Brodeur, a homeowner asked his neighbor to do some work for him on his home. But the neighbor got hurt on the job. The homeowner thought he was hiring an independent contractor who had his own insurance. The court rejected that reasoning, and found instead that the homeowner was the neighbor's employer and therefore should have had workers compensation coverage in place to cover the possibility of injury on the job. Because workers compensation wasn't there, the homeowner has to cover the costs personally.
Failing to hire an insured, licensed, and street-legal contractor could potentially cost you everything you own. If the worst happens, you could be sued into bankruptcy, and most state laws only allow you to keep a very limited amount of wealth or property once you declare bankruptcy.
Most homeowners insurance policies specifically exclude damages arising from the work of unlicensed contractors, so they will not protect you. You may be able to isolate investment properties from your own personal holdings via the skillful use of entities. But you could still lose the property in a bankruptcy proceeding if you don't have the liquidity to pay a judgment.
Using an unlicensed contractor to save a few dollars may be tempting in the short run, but the potential risks far outweigh the benefits.