Hidden Cost of Exemptions

August 17, 2018

Introduction

Every Homeowners Association (HOA) Board will at some point hire a third party (vendor) to perform certain tasks on behalf of the HOA or to furnish services to the HOA and its members. In doing so, a HOA may be exposed to liability brought about by the vendor’s actions and/or the terms of the vendor contracts.  Because such liability may substantially impact the financial interests of the HOA and its members, HOA Boards of Directors and community managers must understand how to properly protect the HOA when hiring a vendor. Credentialing services like those provided by Enterprise Risk Control (“ERC”) transfer the risk exposure back on the vendor.

 

Before making the decision to exempt or waive a vendor from being credentialed, there are several items to consider:

 

Licensed, Bonded and Insured Vendors

Unlicensed vendors are rarely bonded or properly insured. This increases the HOA’s risk exposure, therefore opening up the HOA to a severe financial risk in the event of property damage or injury.  For example, when you hire an unlicensed general contractor, the general contractor and their insurance carriers are the primary payers in the event something goes awry on the job. If that general contractor is not licensed and insured to handle the project, the HOA is general contractor!

If an unlicensed contractor breaks a sewer line, the HOA is responsible. If a worker gets hurt and can’t work for two years, and there’s no workers compensation covering in place, the HOA is on the hook for that workers medical bills and lost wages.

An HOA that hires an unlicensed or uninsured vendor also subjects itself to potential liability for unpaid wages or worker’s compensation claims brought by the vendors’ employees.  

The issue of lapsed coverage is also important here, studies have shown that over 45% of vendors have had a lapse in one or more of their policies in the past two years.   

 

Past Financial Practices

Hiring vendors with questionable financial practices can also place the HOA in a precarious position. Credentialing vendors to verify bankruptcy history and outstanding lien and judgment liabilities provide confidence that the vendor has the financial stability to finish the job to completion without walking away after receiving the first payment.

 

It’s the Law

The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals, threats to national security, foreign policy or the economy of the United States.

Sanctioned organizations, companies and individuals are listed on the Specially Designated Nationals and Blocked Persons (SDN) list and other government watch lists. Most HOA’s are unaware that that they are breaking laws by doing business with people or organizations on these lists and don’t check their vendors against them. As a result of this, many companies and non-profits, large and small, are fined for inadvertently transacting business with U.S. sanctioned organizations. Companies who are slapped with fines, many in the hundreds of thousands and even multi-million dollar range, usually had no idea that their vendor was on one of these lists.

 

Hidden Dangers with Friends and Family

Hiring friends as contractors doesn’t make the liability and risk issues go away. Everyone can enter an arrangement with the best of intentions, but when your buddy falls off the ladder and files a claim with their insurance company, they may well pay the claim and then go after you in subrogation proceedings (the area of law in which insurance companies fight to get reimbursed after paying their customers’ claims).

In one California case, Mendoza v. Brodeur, a homeowner asked his neighbor to do some work for him on his home. But the neighbor got hurt on the job. The homeowner thought he was hiring an independent contractor who had his own insurance. The court rejected that reasoning, and found instead that the homeowner was the neighbor’s employer and therefore should have had workers compensation coverage in place to cover the possibility of injury on the job. Since workers compensation wasn’t there, the homeowner has to cover the costs personally.

Closing

There are scenarios where exempting/waiving a vendor from going through the credentialing process makes sense. But exceptions made blindly, without understanding the impact of the vendor’s failed criteria, greatly increases the HOA risk exposure and inevitable financial loss.

 

Enterprise Risk Control brings to market one of the most advanced, feature-rich vendor management solutions in the industry. Our technology, coupled with our unparalleled service, allows you to automate the collection of vendor information based on their risk exposure. This information is continuously evaluated against your criteria, thus reducing your exposure while giving you the tools to effectively manage your vendor database. ERC services all sizes of business across all business verticals. Small oversights can have enormous consequences; let ERC provide you with the peace of mind that comes from knowing that you are proactively protecting your business with our accurate, intuitive and customizable compliance solution.

 

 

 

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