A common mistake made by HOA directors and/or management personnel is the belief that the association does not need to carry workers compensation insurance if they do not have employees. Under state laws, a homeowners association is subject to being held liable for employment related injuries if an unlicensed and/or uninsured service provider hired by the association, who the association believed to be an independent contractor, gets injured during the course of providing the services to the association.

The status of a service provider as either an independent contractor or an employee has substantial ramifications to a homeowners association. When a service provider is deemed to be a true independent contractor, the association does not have the same workers compensation insurance and tax withholding responsibilities that it has for employees. Furthermore, the association has less exposure for damages caused by a service providers negligence when the vendor is an independent contractor as opposed to an employee.

The Importance of Having a Proper License

State laws mandate that people and business entities that provide contracting services which are valued at a specified minimum amount (i.e. $500), be properly licensed. Being properly licensed requires both a business license, which is typically issued by the city in which the business is located, and a license to engage in the type of contracting business being operated by the service provider (i.e. painter, plumber, electrician, general contractor). Having an appropriate contractors license means that the person who is responsible for the business has been properly trained and educated in the area of the service being provided and has complied with required insurance and bonding requirements.

A homeowners association that hires an Unlicensed and/or Uninsured service providersto provide services for the association is deemed by state laws to be the employer of the contractor and all of the employees who work for the unlicensed contractor. Thus, if the unlicensed contractor or his/her/its employees suffer an injury while providing services to the association, the association is subject to being liable for damages suffered by the injured party. This liability is imposed even if the contractor lied to the association management personnel by falsely stating that he/she/it had the required license and insurance.

The Importance of Having Workers Compensation Insurance

In addition to being properly licensed, service providers must also be properly insured. Being properly insured necessitates various types of insurance including liability and workers compensation. Liability insurance carried by a service provider provides a certain amount of protection for those who suffer property damage or personal injuries due to conduct by the contractor that is covered by the terms of the insurance policy (i.e. negligence). Not having liability insurance may limit the ability for a homeowners association or other party to collect damages caused by the contractor, but it does not impose the same financial risks to the association that result from the contractor not having the required workers compensation insurance.

To protect against unanticipated losses that result from claims by injured workers that are not covered by workers compensation insurance, homeowners associations should purchase a workers compensation insurance policy— even in the absence of having any employees. Such a policy protects the association against liability if it turns out that someone who was believed to be properly licensed and insured is not. This is typically discovered after someone has been injured on the job and makes claims against those who are responsible for having the insurance that did not exist.

The cost of workers compensation insurance is dependent upon many different factors including the nature of the business obtaining the insurance, and the amount of the compensation that is paid to service providers that are not properly licensed and insured. Representatives of the insurance companies that provide workers compensation coverage typically perform annual audits of payroll and other records and/or require periodic reporting by the association to determine what the annual cost of the workers compensation is. The association will not be charged premiums for service providers that have provided the association with proper documentation to prove that they are licensed and insured.


Homeowners associations that hire unlicensed and/or uninsured service providers are subjected to substantial potential liability that could severely impact the associations finances. Because HOA directors are charged with fiduciary responsibilities to the associations members, they must be diligent and act responsibly in connection with the retention of service providers. Delegating the responsibility for the retention of service providers to property managers does not relieve the associations directors from their responsibilities so it is critical that proper procedures are followed by all those acting on behalf of the association in connection with the retention of service providers. Thus, there should be policies in place which mandate that all service providers retained by the association be properly licensed and insured. Association management personnel can verify the proper licensing and insurance coverage by investigating public records that are available on governmental agency websites and by requiring proof from the service providers. It is also extremely important for agreements with service providers to be properly documented, approved, and authorized by the associations board of directors. Proper documentation of contracts with service providers typically necessitates involvement by the associations legal counsel in the drafting of the agreement.