Insurance & Liens
This chapter covers the two protections every contractor must understand: the insurance you carry to shield workers and third parties from harm, and the lien and notice tools that protect you when a customer fails to pay. Workers' compensation and mechanics' liens are heavily tested, so know the deadlines and dollar figures precisely.
Workers' Compensation Is Mandatory for Every Employer
California law requires every employer to carry workers' compensation insurance the moment it hires its first employee. There is no minimum headcount and no waiting period — part-time, seasonal, temporary, and casual workers all count. You can satisfy the requirement through a private insurer, the State Compensation Insurance Fund, or, with state approval, by self-insuring. Sole proprietors and partners are generally not required to cover themselves but may choose to opt in.
Penalties for Operating Without Coverage
Failing to carry required workers' compensation insurance carries some of the harshest penalties in contractor law. The CSLB suspends the license automatically when it learns coverage has lapsed, with no hearing required, and the suspension stays in place until current proof of coverage is filed. The Division of Labor Standards Enforcement can issue a stop-order halting all work immediately, and an uninsured employer faces a misdemeanor along with steep monetary penalties.
No-Fault Coverage and the Exclusive Remedy
Workers' compensation is a no-fault system: an injured worker collects benefits regardless of who caused the accident, and need not prove the employer was careless. In exchange for this certainty, the system is the worker's exclusive remedy — the employee generally cannot sue the employer in civil court for a workplace injury. This trade-off gives workers prompt, predictable benefits while protecting employers from unlimited lawsuits and jury awards.
The Workers' Comp Claim Process
When an employee reports a work injury, the employer must provide a DWC-1 claim form within one working day. The worker completes the employee portion, the employer fills in its section, and the form goes to the claims administrator to start the case. To prevent treatment delays while the claim is investigated, the employer's insurer must authorize and pay for medical care up to $10,000 — even before the claim is formally accepted or denied.
Disability Benefits Under Workers' Comp
Workers' compensation pays several types of benefits. Medical care covers all reasonable treatment for the injury. Temporary disability replaces lost wages — generally two-thirds of average weekly earnings — while the worker recovers. When the doctor decides the condition will not improve further, the worker is declared 'permanent and stationary,' and any lasting impairment is rated for permanent disability benefits. A worker who cannot return to the old job may receive a supplemental job displacement voucher for retraining, and dependents of a worker killed on the job receive death benefits.
Corporate Officers and Uninsured Subcontractors
Corporate officers and directors who own stock in the corporation may elect to exclude themselves from workers' compensation coverage by signing a written waiver, but rank-and-file employees can never be excluded. Contractors must also watch their subcontractors: if you hire an unlicensed worker, that person is treated as your employee, and if a licensed subcontractor lacks its own workers' comp insurance, the general contractor is treated as the employer of the sub's workers and is liable for their injuries. Always collect a current certificate of insurance from every subcontractor before work begins.
Commercial General Liability Insurance
Commercial General Liability, or CGL, insurance protects the contractor against claims by third parties — people who are not employees — for bodily injury and property damage caused by the contractor's operations or completed work. For example, if a passerby is hurt at the job site or a finished structure damages a neighbor's property, CGL responds. It is separate from workers' compensation, which covers your own employees, and many project owners and lenders require proof of CGL before allowing work to start.
Other Business Insurance and the Certificate of Insurance
Beyond workers' comp and CGL, contractors carry other coverage to match their risks. Builder's risk insurance protects a structure under construction against fire, theft, vandalism, and weather damage before it is finished. Commercial auto insurance covers company vehicles, and errors and omissions insurance covers claims arising from professional design or advice services such as design-build work. A certificate of insurance is a one-page summary issued by the insurer that proves a policy exists; it can be forged, so verify dates and call the insurer directly when in doubt.
Insurance Versus Surety Bonds
Insurance and bonds are often confused but work very differently. Insurance is a two-party contract in which the insurer agrees to absorb the insured's losses in exchange for premiums. A surety bond is a three-party agreement: the principal (the contractor) promises performance, the obligee (the customer or the public) is protected, and the surety guarantees the obligation. If the surety pays a claim, it then seeks reimbursement from the contractor — so a bond is not a substitute for insurance, and a contractor who triggers a bond claim still ultimately owes the money.
Mechanics' Liens and the Preliminary Notice
A mechanics' lien gives contractors, subcontractors, laborers, and material suppliers a security claim against the improved property when they are not paid for their work or materials. Most claimants must first serve a preliminary notice on the owner, the direct (prime) contractor, and any construction lender within 20 days of first furnishing labor or materials. The prime contractor who has a direct contract with the owner does not need to serve a preliminary notice on that owner. Serving the notice late shortens lien rights to only the 20 days of work before the notice was given.
Lien Deadlines and Recording
After serving any required preliminary notice, a claimant who is not paid must record the mechanics' lien with the county recorder within strict deadlines tied to project completion. If the owner records a notice of completion or cessation, the direct contractor has 60 days to record a lien and everyone else has 30 days. If no notice of completion or cessation is recorded, every claimant has 90 days from actual completion of the work. Missing the deadline permanently destroys lien rights, so calendar these dates carefully.
Enforcing, Releasing, and Bonding Around a Lien
Recording a lien is only the first step. To keep the lien alive, the claimant must file a foreclosure lawsuit to enforce it within 90 days after recording, or the lien expires automatically. Once payment is received, the claimant should promptly record a release of lien, since failing to clear a paid lien exposes the claimant to damages. An owner who disputes a lien can remove it from the property's title by recording a lien release bond equal to 125 percent of the lien amount. On private projects, an unpaid subcontractor or supplier may also serve a stop payment notice on the owner or lender, directing them to withhold funds owed to the prime contractor; joint check agreements, where the owner writes one check naming both the contractor and the supplier, are another practical way to make sure lower-tier parties get paid.