What is vendor insurance? Homeowners associations hire vendors all the time, but even that comes with risks. Vendor insurance helps ensure that the association is protected from potential liability. Boards should learn what vendor insurance covers and how to check that contractors meet the requirements.
What is Vendor Insurance?
Vendor insurance is not a type of policy that HOAs and condominiums can get. It simply refers to the insurance vendors obtain, ensuring they have adequate coverage to protect the association from liability. The association is then listed as an “additional insured” party in the policy.
Vendor insurance serves as a safety precaution for associations. If something goes awry while contractors are servicing the community, boards can rely on insurance to cover the losses. Of course, vendors must carry the proper policies in the first place to ensure protection. It is the board’s job to verify that all service providers are appropriately insured.
Typical HOA Vendor Insurance Requirements
Vendor insurance requirements can vary from one community to another. Most governing documents require vendors to maintain an active insurance policy and meet minimum liability limits throughout the contract period. This often involves the board checking for updated certificates every year.
Some associations also require vendors to sign indemnification agreements. These agreements state that the vendor accepts responsibility for claims arising from its work.
While specific dollar coverage can change, many HOAs require vendors to carry at least:
- $1 million per occurrence
- $2 million aggregate general liability coverage
- Workers’ compensation coverage
- Commercial auto insurance, if vehicles are used
- Additional insured endorsement naming the HOA
Construction-related vendors may also need umbrella coverage of at least $5 million for large projects.
Types of HOA Vendor Insurance
There are five types of vendor insurance common for associations: general liability insurance, workers’ compensation, commercial auto insurance, professional liability insurance, and umbrella coverage. Let’s discuss these below.
1. General Liability Insurance
This is the most common requirement. General liability insurance covers bodily injury, property damage, personal injury claims, and legal defense costs. For instance, if a vendor damages a gate or someone slips on the vendor’s equipment, this policy may apply.
2. Workers’ Compensation Insurance
Workers’ compensation covers employee injuries that occur on the job. If a vendor’s employee gets hurt in the community and the vendor lacks workers’ compensation coverage, the injured worker might attempt to pursue the HOA for damages. Many states require this insurance by law.
3. Commercial Auto Insurance
This covers vehicles used for business purposes. An association may require this from vendors who drive through the property regularly. Common examples include landscapers, pool companies, and maintenance contractors.
4. Professional Liability Insurance
Also called errors and omissions insurance, this protects against claims involving professional mistakes or negligence. Associations often require this from engineers, architects, accountants, consultants, and reserve study specialists.
5. Umbrella or Excess Liability Insurance
Umbrella coverage provides additional protection beyond the standard liability limits. Large HOAs or high-risk projects may require vendors to carry higher limits through umbrella policies.
What is Vendor Insurance? What Happens if a Vendor is Uninsured?
Hiring uninsured vendors can expose the association to major risks. The HOA could face everything from lawsuits and increased insurance claims to higher insurance premiums and difficulty recovering losses. The association would have to pay for damages out of pocket, often forcing the board to levy special assessments or significantly increase dues.
In turn, board members may face criticism from owners for failing to perform proper due diligence. Homeowners may remove the directors in question or even sue them personally. This is why many associations adopt formal vendor screening procedures.
How to Ensure Vendors Carry the Right Insurance
Boards have a duty to ensure that all vendors and service providers maintain active insurance policies. Here are the steps to follow.
1. Ask for a Certificate of Insurance
Boards should require vendors to provide a copy of all their insurance certificates. A certificate of insurance, often called a COI, is a document that proves the vendor has active coverage. This certificate shows the insurance company’s name, policy number, coverage type, policy limits, and effective dates.
Furthermore, it is common practice to request to be listed as an “additional insured” on the vendor’s liability policy. This can provide the HOA with extra protection under the vendor’s coverage.
2. Ensure Coverage is Sufficient
Not all insurance policies are relevant, and some vendors don’t maintain the right ones. Boards should ensure the vendor carries the appropriate types of insurance. For example, if a vendor only has general liability but not workers’ comp or commercial auto insurance, it can be a red flag.
3. Update Regularly
Board members should keep track of all renewal dates. This way, vendors won’t put one over the association, whether intentionally or not. Once the renewal date approaches, boards should request an updated COI to ensure the coverage won’t lapse mid-project.
How Much Does Vendor Insurance Cost?
The cost of vendor insurance can vary widely depending on a few factors. These include the vendor type, the required coverage amount, the number of employees, and the level of risk involved.
Vendors working with HOAs and condos commonly need a general liability policy at a minimum. Small vendors with low-risk operations can expect to pay as little as $40 to $100 per month for this type of insurance. Meanwhile, high-risk contractors often pay more.
Common price ranges include:
- $40 to $150 per month for General Liability Insurance
- $45 to $300+ per month for Workers’ Compensation
- $150+ per month for Commercial Auto Insurance
- $35 to $100+ per month for Professional Liability Insurance
- $75+ per month for Umbrella Liability Insurance
Does the HOA Pay for Vendor Insurance?
No. It is a common misconception that associations must carry a separate type of insurance for vendors. In general, vendors pay for their own insurance policies so that the HOA doesn’t get into legal trouble. The association is then listed as an additional insured on the vendor’s policies.
The role of the HOA and its board is to verify that coverage exists and is sufficient. Vendors must be properly insured before they are allowed to work in the community.
That said, many vendors factor insurance expenses into their contract pricing. As a result, communities might indirectly absorb a portion of the insurance costs through service fees.
What is Vendor Insurance? Answered!
Vendor insurance protects associations against liability arising from contractors and service providers. It helps cover injuries, property damage, and other claims that may arise during vendor work. Before hiring any contractor, the board should confirm that proper insurance coverage is in place. This will help reduce legal and financial risks for the community.
National Realty Partners is a leading provider of HOA management services in Virginia. We can help your board manage and enforce the rules. Call us today at 703-435-3800 or request a proposal online!
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