Financial Self Defense: Beware of Unlicensed Contractors

It happens all too often - someone with a pickup truck and a smile will knock on your door, mention something about your house that may need work, and they'll offer to do it at a cost that seems almost too good to be true. Frequently, they'll tell you they were working in the area anyway, which is part of why the job will be so cheap. But it pays to do a bit of research. Here's why:

Liability. Legitimate businesses carry two kinds of insurance that protects both themselves and you, the customer...

  • Liability insurance. If the contractor or his employees cause damage to your property, or a neighbor's property, they will generally carry insurance or have posted a bond to ensure that they can make good on any damages. Sure, you can file a lawsuit and maybe win a judgment. But having a judgment and collecting on it are two different things. A licensed contractor will generally have enough insurance coverage to ensure you will be made whole in case of any kind of claim.
  • Workers compensation. Unlicensed contractors typically don't provide workers compensation coverage to their workers. Most states require this coverage, which covers any medical costs incurred by workers injured on the job, as well as some disability benefits. If a worker gets injured on the job, and this insurance isn't in place, that worker could sue both the employer and you, the property owner, for damages.

Jail time. It's true: In some jurisdictions, using unlicensed contractors not only jeopardizes your own finances - it's actually a crime.

Scams. Most unlicensed contractors mean to actually do the work. But one common scam goes like this: The scammer will begin work, then asks you for money "to go buy some of the materials they need." Then you give the contractor the money, and you never see them again. Or there may be an injury, for which you as the property owner are expected to provide compensation. The injury could be legit... or it could be part of the scam.

Worse yet, unscrupulous contractors could begin work, tear your roof open, for example, and then demand much more money than agreed upon to close the roof. Had you used a legitimate contractor, you would have recourse to your state licensing boards for unethical work or breaches of contract. Legitimate contractors don't want to lose their license, so they will work very hard to satisfy you as a customer and prevent racking up a track record of complaints.

How to Avoid Them

The simplest thing to do is ask for their license number. If they can't give it to you, or claim to be "working under someone else's license," then don't let them touch a thing. Also, ensure the contractor gets a permit for any construction projects or anything that involves digging. Legitimate contractors will normally arrange for the permits themselves. If they ask you to get the permit, consider that a red flag. It may be they are no longer welcome at the permit office - or they don't have the cash to get a permit. Either way, it doesn't bode well.

The Bottom Line

Using licensed contractors is a smart move in many ways: It encourages and supports the legitimate, law-abiding businesses in your community. You can generally expect a better quality of work. It encourages employment in your community, as unlicensed contractors are more prone to hire illegal workers. And it protects you against unwanted liability when things don't go as planned.