As you sit at an association board meeting discussing which painter to hire, the board president says, “My brother-in-law does painting on the weekends and we can get him to do the work for half the price of a regular contractor.” Two other board members chime in about how great it will be at the next annual meeting to receive high-fives from homeowners for coming in so far under budget. As the board begins to formally vote for the brother-in-law, you, as association manager, interrupt to say that the board’s proposal might not be such a great idea, after all. No offense to the president’s brother-in-law, but there is more to choosing a vendor or service provider than family lineage, friendship or casual acquaintance.

An association board member or manager should conduct a certain level of due diligence prior to entering into vendors contracts. The most obvious place to start is to obtain a reference or referral and not just pick the vendor out of the yellow pages or a Google search. An association can obtain several referrals of vendors with a proven track records from the association manager or from other associations. As Nordstrom and Starbucks know, word or mouth is a highly effective form of advertisement and networking.

Once a vendor is identified, make sure to confirm that they are insured, licensed and bonded (if appropriate). Most everyone has heard these terms, but not every person understands what “insured, licensed and bonded” actually means and more importantly, what protections, if any, these elements provide.

“Insured” means that the entity or individual has appropriate insurance coverage to cover the vendor’s negligent acts. Be mindful that most insurance policies exclude intentional conduct. Also, insurance does not cover general breaches of contract, unless the breach results in bodily injury or property damage in a sudden event or occurrence. For example, insurance would not cover a painter who only applies one coat of paint instead of the contracted for two coats, or the landscaper who overzealously prunes the association’s favorite rhododendrons. Insurance should, however, cover the cost of repainting a car that was covered with overspray from painting the condominium exterior, or for bodily injuries suffered when a plumber inadvertently forgets to set his parking brake and his truck rolls over a homeowner’s foot.

For major contracts it is important for the association to insist on an adequate dollar amount of coverage, and be named the insured on the vendor’s policy. It is not enough to simply be identified as an “additional Insured” on the vendor’s certificate or declarations page. The association should require the vendor to provide a copy of the “named insured” page of the vendor’s policy. Being a named insured on a contractor’s or vendor’s policy simplifies and streamlines the tender, defense and indemnity process.

“Licensed” simply means the vendor or service provider is registered to conduct business in the state. For more specialized vendors, such as general contractors, it is imperative to know that the individual or company has followed the regulatory requirements required to conduct its specific type of business. Although not a guarantee of quality or proficiency (because most state licensing requirements are simply a revenue generating process rather than a testing methodology), it is more of a red flag if the vendor is not licensed. Plus, many insurers require the policyholder be licensed in order for coverage to apply.

“Bonded” is another form of insurance, ordinarily for vendors who have access to client’s personal items or other similar losses. Bonded coverage is ordinarily limited to a nominal dollar amount, such as $5,000 or $10,000 and often covers intentional acts such as theft. This coverage would apply to a painter who has a bond and steals a homeowner’s $3,000 diamond watch. In such a case, the homeowner or association could file a claim directly against the painter’s bonding company.

A “Performance Bond” is another type of bonding insurance. In Washington, general contractors are required to have a $12,000 performance bond, while subcontractors are required to have a $6,000 performance bond. Unlike standard business or commercial general liability policies, performance bonds are designed to provide coverage to the aggrieved association or homeowner who suffers a pecuniary loss resulting from the contractor’s malfeasance, breach of contract or intentional act. As with standard bonds, the dollar value of performance bonds is quite low and may not cover the total value of damages suffered by the association.

To avoid tax, human resource and heightened litigation risks, it is important for the vendor to be an independent contractor, and not an employee of the association. The contract should be clear on its face that the relationship is between a client-vendor, and not employer-employee.

Lastly, association boards should be cognizant of conflict of interest issues. If a board is contemplating contracting with a family member or friend of a board member, certain precautions should be taken, including, but not limited to, refusal of the affected board member from voting to hire the individual or entity.

As with most board decisions, common sense is the most effective tool in the decision making process. Due diligence, prudence and following the foregoing steps should also keep association boards and managers from falling into the brother-in-law trap.

For a more detailed summary of hiring vendors or other service providers please click here.