Contractor License Bonds

What Are They?

A contractor license bond is a form of license and permit bond. Many states rely on license bonds to maintain a high standard of performance for professionals of all sorts. This can include everyone from construction contractors, funeral directors and barbers, and many other occupations. They’re called license bonds because you have to purchase one in order to get licensed and/or remain licensed to do business in a given state or municipality.

Contractor Bond Requirements

Learn more about where contractor license bonds are required, who needs them, and why they are necessary:

Where Are They Required?

Some states license contractors at the state level, while others don’t. When there is no statewide license requirement, individual municipalities may require contractors to obtain a license in order to bid on public works projects and/or residential remodeling or other private construction projects within the municipality. Contractors operating in more than one such jurisdiction may need to obtain a contractor’s license bond in each of them.

If you’re unsure whether a bond is needed in the area you will be working, contact one of our agents today for assistance.

Who Needs Them?

Every state’s regulations are different. Some states require only general contractors to be licensed statewide. Others also require specialty subcontractors like electricians, plumbers, and HVAC professionals to be licensed at the state level. In general, if you need a state license to work as a contractor in the construction trades, you’ll also need to purchase a contractor license bond.

The same is true at the municipal level. A license requirement may apply only to general contractors or to specialty contractors as well.

Why Are They Required?

These bonds help ensure the quality of construction work and the integrity of the construction industry. They also provide financial protection for construction project owners and the taxpayers or investors who ultimately are paying for the work. Without a contractor surety bond, these stakeholders would bear the financial burden of a contractor’s default or failure to deliver results on time, within budget, and to an acceptable level of quality.

How Do They Work?

Contractor license bonds are a type of construction surety bond. Every surety bond involves three different parties. In the case of these bonds:

• The Obligee is the state agency or municipal entity requiring the bond
• The Principal is the contractor
• The Surety is the company that issues the bond

Each of these parties has specific rights and/or responsibilities under the terms of the bond:

• The obligee has the right to specify what the contractor must do to maintain a license in good standing. Essentially, this means conducting business in a manner that complies with all applicable rules and regulations. The obligee also extends to project owners the right to file a claim against a contractor’s bond if the contractor, as principal, fails to follow all licensing laws.
• The principal gains the right to operate in the given state or municipality. The license bond is the principal’s guarantee to conduct business is an ethical manner in accordance with the law. As such, it carries certain financial obligations if that guarantee is broken.
• The surety takes on the financial responsibility for compensating the obligee for any monetary losses incurred as a result of the principal’s failure to live up to the terms of the bond.

What Happens When A Claim Is Filed?

Ideally, the principal will abide by all applicable rules and regulations, and there will be no reason to file a claim against the bond. However, any customer (project owner or investor) who suffers a financial loss because of the principal’s violation of the laws governing the construction industry can file a claim. Once a claim has been filed, the surety will investigate it and determine whether the contractor is at fault. If the surety finds that a claim is valid, it will be paid. As principal, the contractor must then repay that amount to the surety. Although the surety company may be willing to allow the principal to stretch the repayment out over several installments, the entire amount, plus interest, must be repaid. Clearly, there are compelling financial reasons to conduct your contracting business in a professional and ethical manner so as to avoid claims in the first place. Be aware that if a claim against your license bond is found to be valid because you’ve violated licensing rules and regulations, your contractor’s license may ultimately be in jeopardy. However, the licensing board makes that determination—not the surety company that issued the bond.

How Much Does A Contractor License Bond Cost?

Each obligee establishes the dollar amount of the bond that an applicant for a contractor license must provide. The surety company determines the premium rate that a given applicant will pay, based on the applicant’s personal credit history and other underwriting conditions. An applicant with good credit may pay as little as 1% to 3% of the total bond amount. Applicants with poor credit will pay more, typically up to 10% of the bond amount. So, depending on the applicant’s credit picture, a $50,000 contract license bond cost could be anywhere from $500 to $5,000 per year.

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