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Who Needs a Home Improvement Contractor’s Bond?
Some states don’t require contractors to be licensed or bonded, regardless of the kind of construction work they do. Other states require contractors to be licensed, but not bonded. And in some states, home improvement contractors are exempt from the license and bonding requirements that apply to other contractors.
To make things even more complicated, in states that do not require home improvement contractors to be licensed or bonded at the state level, they may be subject to local licensing and bonding requirements, either at the county or city level. When this is the case, the local jurisdiction (the “obligee” requiring the bond) has established the required bond amount at $10,000.
To add another level of complexity, any license or bonding requirements may depend on the dollar value of the projects the contractor undertakes. For example, in certain counties in Tennessee (Bradley, Davidson, Haywood, Hamilton, Knox, Marion, Robertson, Rutherford, and Shelby), home improvement contractors working on projects valued between $3,000 and $25,000 must furnish each project owner with a home improvement contractor bond. If the value of a project exceeds that limit, the individual must obtain a regular contractor’s license.
What Is the Purpose of a Home Improvement Contractor’s Bond?
Home improvement contractor’s bonds provide financial protection for homeowners. The terms of such bonds require the home improvement contractor to operate in full compliance with all applicable laws and regulations, including local building codes and specifications. If the contractor commits a violation that causes a monetary loss for the homeowner, the homeowner can file a claim against the bond and be compensated for the loss, up to the full amount of the bond.
How Does a Home Improvement Contractor’s Bond Work?
There are three parties to a home improvement contractor’s bond—the obligee, the contractor (known as the “principal”), and the bond’s guarantor (the “surety”). In approving an application for a home improvement contractor’s bond, the surety is agreeing to lend the principal enough money to pay any claim that the surety finds to be valid. But the principal is legally obligated to pay the claim, and the surety is indemnified against any liability for it.
The surety typically will issue payment directly to the claimant, as an extension of credit to the principal. The principal must then repay that debt to the surety. Failure to do so can result in the principal taking legal action to recover the funds.
How Much Does a Home Improvement Contractor’s Bond Cost?
Home improvement contractor bonds are sold for an annual premium that is a small percentage of the required bond amount. The surety sets that percentage, the premium rate, based on the contractor’s creditworthiness. A contractor with a high personal credit score presents a low risk of not repaying the surety for claims paid on the contractor’s behalf. Low risk warrants a low premium rate, while those with lower credit scores will pay a higher premium rate due to the higher risk level. Applicants with good credit are typically assigned a premium rate of between 1% and 3%.
What Other Bonds May Be Required?
Home improvement contractors may be required to purchase other types of construction bonds, especially on larger projects. The additional construction bonds most likely to be required are performance bonds, payment bonds, and maintenance bonds.
A performance bond protects the homeowner against having to pay out-of-pocket to complete work left unfinished if the principal defaults on the contract. If the principal becomes insolvent or fails to complete the work for any other reason, the obligee can file a claim against the performance bond. The surety typically helps the obligee arrange another way for the project to be completed using the proceeds from the claim.
A payment bond is the principal’s guarantee to pay suppliers, laborers, or specialty contractors for their contributions to a project. In the event of nonpayment, the injured party can file a claim against the bond for damages and be compensated for their loss.
A maintenance bond is essentially a warranty on the work done by the principal. It’s the principal’s guarantee to correct defects that surface within a specified period of time (typically one year) after completion of the project. If the principal does not correct the problem voluntarily, the homeowner can file a claim against the maintenance bond to pay for the necessary corrective action.
Be sure to check the bonding requirements in the area(s) where you will be working.
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