If you're a homeowner and you plan to hire a contractor this summer to get some work done around the house, beware of what's known as a workers' compensation "ghost" policy. This spook isn't just scary - it's dangerous to your wallet! It can leave you on the hook for a personal injury claim if your contractor's employee gets injured while working on your property.
What's A Ghost Policy?
Workers' compensation ghost policies are legal fictions created by the insurance industry in order to give sole proprietors "proof" that they are covered under workers' compensation. In reality, the only people covered by the policy are non-existent employees, or "ghosts."
How does this work? Easy. The contractor goes to the insurance agent and signs a paper saying that he or she has no employees and legally excludes himself or herself from coverage. The insurer then issues the certificate of insurance that "proves" the contractor has workers' compensation coverage - even though no employees are actually covered.
The contractor - who runs his or her business as a sole proprietorship - then hires employees as sub-contractors on a cash-only basis and totally skirts the trouble and expense of having to pay a real workers' compensation insurance.
Why Are They Used?
Because the contractor is aware that his or her line of work is dangerous, he or she is also aware that actual workers' compensation insurance is expensive. By comparison, a ghost policy costs very little. Using a ghost policy lets the contractor do three things:
- Reduce overhead costs.
- Offer cheaper rates (with the hope of attracting more work).
- Be able to hand the homeowner (you) a Certificate of Insurance (COI) so that you believe that you're protected in case the contractor's employee slips off a ladder while rebuilding your fireplace.
Most of the time, homeowners never know about the ghost policies, because everything goes smoothly. However, when an accident does happen - like when your contractor's nephew who has been working "under the table" for his uncle all summer suddenly trips over a pile of bricks for your retaining wall and breaks his leg - you can find yourself the subject of lawsuit. Typically, the injured worker will go after your homeowner's insurance in order to collect for his or her damages.
How can you protect yourself?
Unfortunately, it's difficult to tell if your contractor is using a ghost policy or not. The COI issued for a ghost policy looks the same as a legitimate policy. However, keep the following in mind:
- It's legal for you to contact the insurance company to ask how many people are covered by the policy. A sole proprietor doesn't have to carry coverage for himself or herself, but if a crew of five show up to work on your roof when you know the policy doesn't cover any actual employees, you know you have a potential liability problem.
- If someone bid on the work and the offer was significantly lower than other offers, realize that the contractor is cutting costs somewhere. It could very well be by paying employees off the books and skirting workers' compensation rules.
If you've become the unfortunate target of a personal injury claim because you were misled about your contractor's workers' compensation coverage for his or her employees, contact an attorney like those at Weathers Law Firm, LLC right away to discuss the case and build your defense. You shouldn't become victimized by someone else's shady business practices.