Insurance, Bonds, and Liens (Overview)

Question 1

What type of insurance will protect the contractor for losses due to a fire on his construction project?

a: All Risk Builders insurance
b: General liability insurance
c: Professional liability insurance
d: None of the above

Answer 1

a: All Risk Builders insurance

Question 2

True or False. General liability insurance will protect the contractor against claims brought by third parties who are not employed by the contractor.

Answer 2

True

Question 3

Who pays for workers’ compensation insurance?

a: The employee
b: The employer
c: Both the employee and employer
d: The federal government

Answer 3

b: The employer

Question 4

A guarantee that a contractor will pay certain subcontractors, laborers, and material suppliers associated with the project would be known as a____________.

a: Bid bond
b: Performance bond
c: Payment bond
d: Maintenance bond

Answer 4

c: Payment bond

Question 5

True or False. Any monies paid out by a surety company will need to be paid back.

Answer 5

True

Question 6

Equipment in transit, on the premises or at the job site, would typically be covered by:

a: General liability policy
b: All risk building insurance
c: Equipment floater policy
d: None of the above

Answer 6

c: Equipment floater policy

Question 7

True or False. A Performance Bond guarantees that the contractor will complete the project according to the contract plans and terms.

Answer 7

True

Question 8

The __________ requires that federal projects valued over $100,000 must produce a performance bond to guarantee completion of the project under the terms of the contract.

a: Walsh Healy Act
b: Service Contract Act
c: Miller Act
d: None of the above

Answer 8

c: Miller Act

Question 9

True or False. Liability Insurance on employees provides coverage over and above worker’s compensation insurance in case of injury or death of an employee.

Answer 9

True

Question 10

True or False. Prime contractors should verify that their subcontractors have secured their own insurance for general liability and workers compensation.

Answer 10

True

Question 11

Can a prime contractor be held liable for a subcontractor whose employee is claiming workers compensation benefits if the subcontractor was uninsured?

a: Yes
b: No

Answer 11

a: Yes

Question 12

Are the owners of a sole proprietorship required to purchase workers compensation insurance to cover themselves?

a: Yes
b: No

Answer 12

b: No

Question 13

Who is responsible to assume legal liabilities for construction accidents?

a: The owner
b: The general contractor
c: The subcontractor
d: Anyone who enters the construction area

Answer 13

b: The general contractor

Question 14

If an inspector is injured on the builder’s job site during his inspection, which of the following insurance policies would be applicable for coverage?

a: Builders Risk
b: General Liability
c: Workers Compensation
d: None of the above

Answer 14

c: Workers Compensation

Question 15

What type of insurance covers a builder against theft of materials from a job site?

a: Liability
b: Builder’s risk
c: Workers’ compensation
d: Homeowners

Answer 15

b: Builder’s risk

Question 16

An employee intentionally injured himself on the job. What percent of workers’ compensation insurance can he collect?

a: 0%
b: 10%
c: 50%
d: 100%

Answer 16

a: 0%

Question 17

If a builder or one of his employees drops a hammer from the roof and injures a member of the public, what type of insurance covers the cost of the injury?

a: Injured persons health insurance
b: Comprehensive commercial general liability insurance
c: Workers’ compensation insurance
d: Homeowners construction lien recovery fund

Answer 17

b: Comprehensive commercial general liability insurance

Question 18

Builder’s risk insurance can be canceled by the:

a: Builder only
b: Home owner
c: Policy holder at any time
d: Property owner

Answer 18

c: Policy holder at any time

Question 19

A bond that insures that the activities on a construction project are the same as the intended activities for which the permit was granted is called a ______________ .

a: Contract Surety Bond
b: Permit Bond
c: Surety Bond
d: Performance Bond

Answer 19

b: Permit Bond

Question 20

___________ is when the homeowner is accepting the risk related to the project, instead of the general contractor.

a: Home owner insurance
b: Wrap-up Liability insurance
c: Key Man insurance
d: Personal Liability Insurance

Answer 20

b: Wrap-up Liability insurance

Question 21

Employers in Michigan are required to purchase workers compensation insurance for their employees when:

a: One employee work 35 hours or more in the past 13 weeks
b: When they have 3 or more part-time employees
c: Someone gets injured
d: Both A and B are correct

Answer 21

d: Both A and B are correct

Question 22

What benefits does workers compensation insurance provide to injured employees?

a: 2/3 wage replacement
b: Medical treatment
c: Rehabilitation benefits
d: All of the above

Answer 22

d: All of the above

Question 23

True or False. A contractor who does not have workers compensation insurance is at risk of being sued for the same benefits provided by workers compensation in the event of an employee injury.

Answer 23

True

Question 24

An employee returns to the work force after being rehabilitated but is no longer able to perform his previous skill. If he accepts a job at a lesser pay scale will workers compensation assist him financially?

a: No
b: Yes, up to 66.6% of his previous earnings
c: Yes, up to 75% of his previous earnings
d: Yes, up to 80% of his previous earnings

Answer 24

d: Yes, up to 80% of his previous earnings

Question 25

What is an insurance policy taken out to cover the financial loss that would arise from the death or extended incapacity of the member of the business specified on the policy. a: Liability insurance b: Workers compensation insurance c: Key man insurance d: Any of the above

Answer 25

c: Key man insurance

Question 26

What type of bond guarantees that the general contractor will pay the subcontractors, laborers and material suppliers associated with the project. It guarantees that the project will have no claims or liens placed against it. a: Bid bond b: Performance bond c: Payment bond d: Any of the above

Answer 26

c: Payment bond

Question 27

Which type of bond guarantees that the project will be completed according to the contract specifications? a: Contract bond b: Performance bond c: Bid bond d: Subcontractor bond

Answer 27

b: Performance bond

Question 28

True or False. General contractors may require their subcontractors to carry a subcontractor bond to insure that the subs are certain to pay their material bills on a given project.

Answer 28

True

Question 29

True or False. Bonds provide protection in the event that contractual obligations are not met.

Answer 29

True

Question 30

True or False. A self employed contractor with no employees is required under Michigan law to purchase workers compensation insurance.

Answer 30

False

Question 31

Each _____________ , or laborer who supplies material or labor to improve a property, has a right to claim that debt owed to him by filing a lien against the property improved. a: Contractor b: Subcontractor c: Supplier d: All of the above

Answer 31

d: All of the above

Question 32

An owner shall provide a complete ______________ to a contractor, subcontractor, supplier or laborer who has requested it. a: Notice of Furnishing b: Letter of Authority c: Notice of Commencement d: Formal Contract

Answer 32

c: Notice of Commencement

Question 33

Subcontractors and suppliers must provide a Notice of Furnishing either personally or by certified mail within ______ after first furnishing materials. a: 7 days b: 10 days c: 20 days d: 30 days

Answer 33

c: 20 days

Question 34

A contractor must provide a Sworn Statement when ___________. a: Payment is due b: When the contractor requests payment c: When an owner demands to see it d: All of the above

Answer 34

d: All of the above

Question 35

True or False. Contractors are required to list materials or cost of materials that are provided in their own inventories on the Sworn Statement.

Answer 35

False

Question 36

A claim of lien by a subcontractor, supplier or laborer shall have attached to it a ______________of a Notice of Furnishing. a: Notice of commencement b: Letter of Authority c: Proof of Service d: Formal Contract

Answer 36

c: Proof of Service

Question 37

If an unlicensed contractor files a lien, the unlicensed contractor is liable for ______________ . a: All costs incurred by initiating the action, including actual costs and attorney fees. b: All costs incurred by initiating the action, except actual costs and attorney fees. c: All damages that result from the action d: Only the court and attorney fees.

Answer 37

a: All costs incurred by initiating the action, including actual costs and attorney fees.

Question 38

True or False. A contract may require in its conditions that a right to a lien is waived or relinquished before any improvement is made.

Answer 38

False

Question 39

A ________________ is used when a contractor is going to be collecting more funds as the job progresses, but is releasing his lien right to the extent of money owed to this point. (The actual payment has been made.) a: Full Unconditional Waiver b: Full Conditional Waiver c: Partial Unconditional Waiver d: Partial Conditional Waiver

Answer 39

c: Partial Unconditional Waiver

Question 40

True or False. A conditional waiver states that the contractor or supplier will not file a lien if they are paid the amount provided on the waiver.

Answer 40

True

Question 41

Waivers that are "______" means that no further claim is expected upon this property. a: Complete b: Full c: Empty d: Open

Answer 41

b: Full

Question 42

Court proceedings to enforce a construction lien must be held within __________ of the date the lien was recorded.; a: 90 days b: 6 months c: 1 year d: 18 months

Answer 42

c: 1 year

Question 43

True or False. If an owner has paid for work done, and the contractor has diverted that money elsewhere, the claim of lien does not attach to the residential structure to the extent of what the owner has already paid out.

Answer 43

True

Question 44

In order for foreclosure, the judge can give the defendant a time limit to pay as ordered, not to exceed _________. a: 30 days b: 90 days c: 4 months d: 6 months

Answer 44

c: 4 months

Question 45

True or False. To bring a construction lien against a condo, the contract must have been with a developer or owner.

Answer 45

True

Question 46

What are the benefits of risk management?

Answer 46

- Lower general and liability insurance premiums - Lower risk of being sued - Better chance of winning a lawsuit

Question 47

In what areas does construction place total liability on the contractor?

Answer 47

- Contractor caused delays to the project (liquidated damages) - Substandard work - Contractor caused added work - Project accidents

Question 48

What is Liability insurance?

Answer 48

This insurance will protect the contractor against claims brought on by third parties who are not employed by the contractor. Liability insurance does not cover a contractor for their own losses; only losses suffered by others that may have been caused by the contractor, their employees or subcontractors.

Question 49

What are the 5 types of Liability Insurance?

Answer 49

- Commercial General Liability Insurance - Umbrella Liability Insurance - Professional Liability - Liability Insurance on Employees - Wrap-Up Liability Insurance

Question 50

What is Commercial General Liability Insurance?

Answer 50

this insurance covers four types of injuries: bodily, loss of property, personal injury, and negligence

Question 51

What is Umbrella Liability Insurance?

Answer 51

This is a supplemental policy that provides additional coverage when a certain deductible is met.

Question 52

What is Professional Liability?

Answer 52

This type of liability policy protects the contractor from liability arising from error or neglect in performance of their duties. It is sometimes referred to as Errors and Omissions. Professional Liability insurance provides protection against claims that the policyholder becomes legally obligated to pay as a result of an error or omission in his professional work.

Question 53

What is Liability Insurance on employees?

Answer 53

This type of liability insurance provides coverage over and above Workers' Compensation in case of injury or death of an employee.

Question 54

What is Wrap-Up Liability insurance?

Answer 54

This type of insurance is generally purchased by a homeowner. This type of policy covers all project related insurances and all parties involved in the project. This is when the homeowner is accepting the risk related to the project, instead of the general contractor. Note: This would include general liability, builders' risk, workers' compensation, employee liability and umbrella insurance.

Question 55

What is Workers' Compensation?

Answer 55

this provides benefits to employees who have injuries or illnesses cause or made worse by their work or workplace. Businesses that employ one or more workers must provide workers' compensation insurance.

Question 56

How many full or part time employees do you need to have before you need to purchase insurance that will compensate employees for death or job-related injuries which occur in the course and scope of employment.

Answer 56

Five or more

Question 57

What are the benefits of workers compensation?

Answer 57

- Partial wage replacement - Payment for loss of use or function - Medical treatment - Vocational rehabilitation - Dependent benefits

Question 58

How can employers obtain workers' compensation insurance?

Answer 58

- Obtaining a policy through a private company authorized to provide workers' compensation coverage meeting the self-insurer requirements set forth by the Workers' Compensation Commission - Joining a self-insurance group authorized to provide workers' compensation coverage.

Question 59

True or False. Vehicles used for business don't have to be fully insured.

Answer 59

False, they must be fully insured.

Question 60

What is Title insurance?

Answer 60

This insurance protects against title defects prior to the date of the policy. Title insurance protects the lender's lien priority in case a mechanic's lien is filed.

Question 61

What is Title insurance?

Answer 61

This insurance protects against title defects prior to the date of the policy. Title insurance protects the lender's lien priority in case a mechanic's lien is filed.

Question 62

What are the Other Types of Insurance?

Answer 62

- Named Peril Builders' Risk Insurance - Inland Marine/Equipment Theft Insurance - Equipment Float - Burglary and Theft Insurance - Key Man Insurance - Insurance for Subcontractors

Question 63

What are the stipulations for paying unemployment tax?

Answer 63

One person for some part of a day in each of 20 different calendar weeks or paid wages of $1,500 or more in any calendar quarter must pay unemployment insurance.

Question 64

How can you get a substantial reduction in tax rates as a contractor?

Answer 64

Have a high employee retention.

Question 65

How can an employee disqualify themselves from unemployment benefits?

Answer 65

- Voluntarily quitting without good cause. - Being discharged for misconduct or unlawful use of a controlled substance - Failing to apply for, or accept an offer of suitable work.

Question 66

What are some conditions an employee cannot be disqualified for in the case of unemployment?

Answer 66

- they quit work because their wages reduced in breach of a collective bargaining agreement. - They are laid off, or discharged for reasons other than misconduct.

Question 67

What is meant by Michigan being an "employment-at-will" state?

Answer 67

This means the employer may terminate any employee at any time, for any reason, or for no reason. As a general rule, therefore, the employee has no right to challenge the termination.

Question 68

Private disability insurance can cover up to what of a worker's salary?

Answer 68

70%

Question 69

What is the difference between short and long term disability?

Answer 69

Short term replaces a portion of your paycheck for a chort period of time (3 to 6 months), while long-term provides coverage for an entire lifetime if necessary.

Question 70

What are the typical benefits of non wage compensation?

Answer 70

- Group health insurance - Disability insurance - Retirement benefits - Sick leave and Vacation

Question 71

Why would you get a business owner policy?

Answer 71

It has all the basic insurance of a business owner bundled into one package. It would cover: property damage, legal liability and employee related insurance.

Question 72

Why do you need Accident insurance?

Answer 72

this protects against accidental injury, even if you have health insurance, unexpected out-of-pocket costs can be expensive. This insurance can provide money to pay deductibles, copays, prescriptions, and physical therapy or ambulance charges, emergency care and out-patient therapy.

Question 73

What is Builders' Risk Insurance?

Answer 73

This insurance covers machinery, equipment, materials and supplies that are, or will become, part of the building under construction. Additional coverage can be added for items such as temporary structures and tools used during construction. Generally, this insurance provides coverage for almost all risks, including theft, vandalism, accidental losses and damage or destruction.

Question 74

What are Contract Surety Bonds?

Answer 74

This is an agreement with a surety company making the surety company financially liable to the customer for non-performance of the contractor. The surety agreement may perform the following: - Finance the contractor until job completion - Employ another contractor - Pay outstanding debts - Allow the owner to finish project Contract Surety Bonds provide financial security and construction assurance on building and construction projects by assuring the project owner (obligee) that the contractor (principal) is qualified to perform the work and will pay certain subcontractors, laborers, and material suppliers. Essentially, a surety bond is a written agreement where one party (the surety) obligates itself to a second party (the obligee) to answer for the default of a third party (the principal).

Question 75

A Contract Surety Bond generally includes what five types of bonds?

Answer 75

Bid Bonds. This guarantees that if the contractor’s bid is declared to be the successful bid, a contract will be entered into for the same amount of that bid. This type of bond is most often used on governmental projects. Performance Bonds. This guarantees the owner that the project will be completed according to the plans and terms specified in the contract. All performance bonds have a face value limitation and will extend to cover any warranties for which the contractor is responsible. Payment Bonds. This guarantees that the contractor will pay certain subcontractors, laborers and material suppliers associated with the project. It guarantees that the project will have no claims or liens placed against it. Subcontractor Bonds. This is a bond which protects the prime contractor from the possibility of subs not paying their bills on a project. Permit Bonds. This is a bond that guarantees that the person who is licensed by the state will perform activities for which the bond was granted, according to the regulations governing the license.

Question 76

How does a surety bond differ from an insurance policy?

Answer 76

If an insurance policy pays a claim there is no debt incurred by the policy owner. If a surety company pays a claim, a debt is incurred by the purchaser of the surety bond. The amount paid out by the surety company will need to be paid back!

Question 77

What is a Lien?

Answer 77

A specific legal process that can be used by contractors and others as a lawful remedy for securing payment for labor or materials that have been used to improve another person's property. Lien laws are also designed to give protection to laborers and material suppliers in the event of default by the contractor or property owner.

Question 78

Where do Liens have to be filed?

Answer 78

With the county A lien on unpaid balance is for the recovery of monies due to the prime contractor. Getting paid through the lien process requires diligence and careful attention to detail. The statutes are very specific, and it is important that you strictly adhere to the state requirements. There is an order of events to filing a lien, and failure to submit the correct documents at the correct time can forfeit your chance to recover any funds. If the notice requirements are not met, there will be no recovery!

Question 79

What documents are needed in order to preserve lien rights?

Answer 79

- Written Contract - Notice of Commencement - Notice of Furnishing - Sworn Statement - Lien Waivers

Question 80

What is a Written Contract?

Answer 80

It shows: Cost of project Clear payment terms and schedule Type and amount of work to be done Type and quality of material to be used Specifications and plans Contractor's license number Signature of contractor Signature of property owner

Question 81

What is the Notice of Commencement?

Answer 81

Tells all interested parties that a construction project is beginning Provided by the contractor Filled out by owner. If the owner does not return the Notice within 10 days of the postmark date, the time the contractor has to provide a Notice of Furnishing is extended. Displayed at the site Residential projects do not need to record at the Register of Deeds Commercial projects must record at the Register of Deeds

Question 82

What is the Notice of Furnishing?

Answer 82

Tells the property owner and general contractor that a subcontractor is going to be providing labor and/or materials to the project Provided by the subcontractor to the owner and general contractor, OR by the general contractor to the owner Provided within 20 days of first providing goods and services

Question 83

What is the Sworn Statement?

Answer 83

Tells the owner, bank or title company where and how the funds will be distributed Provided by the subcontractor to the general contractor, or the contractor to the owner, bank, or title company Provided when payment is due, when the contractor requests payment, or when an owner demands to see it

Question 84

What are Lien Waivers?

Answer 84

- Tells the owner, bank and title company that the contractors that were paid on the sworn statement can no longer claim a lien against their property - Waives the contractor's right to place a lien on the owner's property for non-payment of contract funds - Provided by material suppliers to the GC, subs to the GC, OR the GC to the owner, bank, or title company - Provided when payment is promised or actually received

Question 85

What is the difference between a Conditional and Unconditional lien waiver?

Answer 85

Conditional: a condition must be met before the waiver is valid, typically that you have been paid partially or in full. Unconditional: No condition must be met before the waiver is valid. You sign it and you forfeit your rights. There are either partial (part payment) or full (you received full payment).

Question 86

What documents will you need when things go wrong?

Answer 86

- Proof of Service of Notice of Furnishing - Claim of Lien - Proof of Service of Claim of Lien - Discharge of Claim of Lien

Question 87

What is the Proof of Service of Notice of Furnishing?

Answer 87

- Proves to the court that the contractor did complete and provide a Notice of Furnishing to the correct parties - Must be filed along with the contractor's claim of lien at the county register of deeds - Provided by the contractor filing the claim of lien - Served to the general contractor and property owner with 15 days of filing

Question 88

What is the Claim of Lien?

Answer 88

- Records the contractor's claim of lien for non-payment of labor and materials provided to the property owner - Must be filed by the contractor claiming the lien at the county register of deeds - Provided by the contractor claiming the lien - Must be filed within 90 days after the last day goods and services were provided

Question 89

What is the Proof of Claim of Lien?

Answer 89

- Proves to the court that the contractor did notify the correct parties that the contractor’s claim of lien has been filed with county register of deeds - Provided by the contractor filing the claim of lien - Served to the general contractor and property owner with 15 days of filing

Question 90

What is the Discharge of Claim of Lien?

Answer 90

- Records that the contractor's claim has been fully paid - Must be filed by the contractor claiming the lien at the county register of deed - Provided by the contractor claiming the lien to the property owner