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   Insurance Scams and the Home Improvement Industry
   by Thomas Kral

   You may have come to read this article thinking that I will speak of ways home owners scam their insurance companies, but that is not the topic of this discussion. Rather, the topic is to discuss how unqualified contractors scam their insurance to offer unrealistic pricing.

Insurance is expensive. We all know this. What you might not know is that a properly classified roofing contractor will have an insurance rate of 41%. What does this mean? It simply means that in order to properly carry workman's compensation insurance 41% of payroll is paid off to an insurance company. For example if a skilled roofer is paid $20 an hour, as a skilled roofer is worth, 41% of this wage is paid to the insurance company. That is $8.20 per hour going to the insurance company per worker. If an average crew is 5 men, and an average work day 10 hours... you do the math.

So what methods do unqualified contractors use to cheat their insurance? A simple way is to be improperly classified. For example a company may carry carpentry insurance instead of roofing insurance. Carpentry insurance carries a rate of about 27%. Therefore that same $20 an hour ROOFER would be misclassified and his unqualified boss would only be paying $5.40 per hour or a savings of almost $2 per hour or again on a 5 man crew, or a savings of approximately $100 a day. On average there are 220 working days per year, again do the math.

Another method many liars and cheats will use is to improperly classify their employees as sub contractors. They will then avoid paying taxes, but will also tell their employees to get their own insurance for a rate of about $350 a year. You may be thinking, that is great, and you may be thinking each employee is covered by insurance... but this is simply not true. At this price of about $350 a year the employee is telling his insurance company that he is a company and telling the insurance company to exempt himself. Therefore nobody really has insurance, all they have is pieces of paper saying they have insurance.

When someone is exempt they are not covered. There is no insurance on that person.

One last sample is for the company to secure insurance, but then stop paying their monthly bills. This enables them to get a generic certificate of insurance showing that they are insured until some date, usually a year form the date the insurance is activated... but since they stopped paying for the insurance the insurance has lapsed and there are really is no insurance.

There are other tricks like having two bank accounts and purposely keeping really poor records so that when the insurance company comes to audit, and they audit at least once a year, they end up just asking for bank statements. Since there are multiple accounts only one or two accounts are shown, and usually the bulk of the money funneled through the other accounts. Less money shown equals lower insurance. Again cheating!

Finally the most unscrupulous and underhanded method of cheating out on insurance and taxes is by just plain paying cash. Each employee is paid cash, no taxes are with held and since their is no "pay roll" there is nothing for the insurance company to charge against, so the contractor has a rate of about $350 a year.


You might be thinking this is great for you, the consumer, but is is NOT! When you cheat insurance you have none. Do you know the purpose of insurance? That's right! Insurance is there just in case something goes wrong. Just think of the cut corners these cheats and cons are taking, if they are taking corners on insurance. You are probably also getting slop work. If something were to happen, you wouldn't be covered because there really is no insurance; just a worthless piece of paper.

If some thing were to happen the claim would go to your home owners insurance, you seriously could potentially lose your property to an injured worker. Let's say everything goes smoothly during the project... Most of these companies who are cheating their insurance need to constantly be on the move not to be caught. They are changing names and phone numbers every few years. What does that mean for you? NO WARRANTY. And chances are likely something will eventually go wrong, since as I said before, these cheats and crooks are cutting corners all over.

What can you do to protect yourself?!

The answer is simple but it requires due diligence on your part. First ALWAYS ask for a certificate of insurance showing not only general liability but also workman's compensation. In some cases there may be two separate certificates, and that's fine. NEXT you MUST contact the insurance companies. Make sure the policies are still in force. Also make sure the contractor is insured for what ever trade he is doing, roofing, electrical, plumbing etc... And if you are feeling really adventurous you might want to ask to be named as an ADDITIONAL INSURED on the policy. This means that if the policy is to laps you will be notified by the insurance company.

While you are at it, some other questions you might also want to ask include licensing and a list of references. Many trades are licensed, some are not. City licensing is pretty basic usually only requiring only a fee to be paid. State licensing is more stringent requiring examination and bonding to ensure financial stability.

To date the ONLY trades that are licensed in the state of IL include roofing, plumbing and electric. Protect yourself hire only reputable and legitimate contractors to work on your property. Protect yourself now so that you do not suffer later and remember that often when you hire the lowest bidder you are gambling... and do you really want to gamble on your largest investment?

National Roof Group Member, Thomas Kral is the owner of Reliable American Roofing in the Chicago, Illinois area. He may be reached by calling 847-729-3496 or visiting their website by Clicking Here: