Article Reviewed by a licensed insurance professional: Sam Meenasian (CA dept of insurance license #0F75955).
Estimated reading time: 5 minutes
This article is general information, not legal advice. Check your state licensing board / consult counsel.
Lots of businesses feel like licenses and bonds are just required by law because the government wants to make money off of their companies. This is not actually the case at all. The government is seeking to protect the consumer and ensure that there are standardized rules that all contractors follow.
To simplify all of this, your contractor license bond promises that you are going to operate ethically, legally, and responsibly. This is a promise that you have backed by money through your bond.
What Does a Contractor License Bond Really Mean?
A license bond is actually a surety bond. This means that this bond is a financial guarantee that you will do business in a certain way, and so will the people who work for you. You, as the contractor, will be the Principal on the bond. The state licensing group will be the Obligor, or the group that is protected by the bond.
The surety company is called the Surety. Along with the Principal (the contractor) and the Obligee (the party requiring the bond), the surety is the third party that guarantees the bonded obligation.
Claims are typically tied to violations of contractor licensing laws and the bond’s conditions (and, in some states, defective construction as defined by law).
Insurance is primarily designed to protect the business policy holder, while a surety bond primarily protects the obligee/consumer or the public.
Why Are These Bonds Required?
Depending on the state, license type, and whether you have employees, you may need to show proof of a license bond and insurance.
Your bond is there to ensure that you are financially responsible for unsafe, illegal, or fraudulent practices. This bond is also proof that you are operating with the law in mind and that you are a legitimate company that can be counted upon to deliver quality work.
A license bond can provide a limited financial remedy (up to the bond amount) if a valid claim is proven under the bond terms; it’s not a guarantee that every loss will be fully covered.
Your bond will require that you comply with state laws and with building codes. Bonds also make the playing field fair and level in ways that other kinds of requirements and legal limits cannot. Consumer confidence often depends upon things like bonds because otherwise, how will people know if a company can be trusted to do good work or not?
A real-world example is the process of getting a bond in California. In this state, the California Contractors State License Board, or CSLB, requires that contractors carry a $25,000 bond.
In California, the bond must be written by a surety company approved through the California Department of Insurance and meet CSLB form and filing regulations. The bond is to protect consumers and suppliers against any harm that could result from working with your business.
This means that if you fail to pay employees, you leave a job unfinished, or you engage in fraud, the bond will force you to make things right.
Who is Allowed to File a Bond Claim Against a Contractor?
Various parties can file bond claims. The homeowner or the owner of a property that you worked with or on, the subcontractor or suppliers that you worked with, or the state licensing board itself.
Each bond will always have a max payout amount associated with it, which is called the penal sum. This can range significantly in value depending on your state or industry. If there is more than one claim filed against you at the same time, the payout cannot exceed this penal sum.
If bond claims are filed against you, your business reputation will take a hit, and if the claim is found to be valid, you will have to pay the damages up to the limit of the bond. You will also have to repay the surety and cover the cost of legal fees.
Claims can be quite expensive in many different ways, and companies that wish to stay in business for the long haul will avoid them at all costs.
How to Remain in Good Standing With Your State Licensing Board
You should always renew your bond before it expires, and be sure to avoid disputes that could lead to claims. Also, make sure that you are following the laws for your state and for local counties. You should pay all of your staff on time, and you should make sure that you have the right bonds and licensing in place for your business niche and industry.
Most states will require that you provide proof of your contract license bond, proof of insurance, and proof of workers’ compensation to apply for a contractor license. These are the items that help establish your legitimacy, and providing them is the first step in the process of staying in good standing with the state.
At USA Business Insurance, we work hard to be sure that your business is covered. No matter what niche or market you operate in, we can help you to get the financial coverage and products that are required to ensure that your business will thrive. Don’t make the mistake of trying to save money or go it alone, ruin your business reputation, and land your company in debt. Work with the skilled team at USA Business Insurance for business insurance products that you can trust.
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“I didn’t realize my license bond had lapsed until the board sent a suspension notice. USA Business Insurance got me reinstated the same day.” — Henry M., General Contractor, California
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“They explained the difference between my performance bond and my license bond and made sure both were compliant before my renewal deadline.” — Lisa D., Plumbing Contractor, Nevada.
