Contractor License Bond Basics

20
March 2017
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Building a career in a skilled trade?

Then licenses and bonds are surely on your mind. If you’re new to the construction industry, you may have a few questions about license bonds. So we’ve gathered up some of the most asked questions and basic information to help you get licensed, bonded, and out to work fast.

Do I Need A Contractor License Bond?

A license bond is typically required by the state or region you live in in order for you to obtain the license you need to operate as a contractor.

Bond requirements and regulations can vary widely from state to state. From Alabama to California to Wyoming, the list of states that require a license bond is fairly extensive.

In California, for example, the State License Board requires that contractors be bonded for $15,000 in order to be licensed. If your coverage lapses or your surety company revokes your bond your license will be revoked as well.

There’s two ways to determine if your state requires a license bond to work as a contractor:

  • Check with your local state license board
  • Check with a surety bond provider

Tip: Even if your state doesn’t require you to be bonded, consider getting one anyways. A license bond can make you more competitive and open up better job opportunities.

How Does A License Bond Work?

A contract license bond is a legal agreement between you, your surety company, and the state agency requiring you to be bonded.

Your license bond insures that you will follow all state laws and regulations pertaining to your specific contractor license.

Contractor bonds exist to protect consumers from fraudulent practices. If your customer is harmed as a result of a law violation, a bond claim can be filed. After a claim is filed then your surety company will investigate the claim. If the claim is filed, a payout will occur. Then you’re responsible for repaying the amount of the bond claim.

Contractor License Bonds 101- Key Terms

  • Claim: A demand made by the obligee for compensation for a loss resulting from the principal’s failure to fulfill contractual duties or follow local laws and regulations.
  • License Bond: A license bond is a type of surety bond a contractor must obtain in order to be licensed in his or her state or region. It guarantees that the party seeking the bond will follow applicable laws and regulations.
  • The Obligee: The client.
  • The Obligor: The company providing the bond.
  • The Principal: The contractor or builder.
  • Surety Bond: A surety bond is a contract in which the surety company, the obligor, guarantees the performance of the contractor, the principal.

Types of surety bonds include bid bonds, payment bonds, permit bonds, and license bonds.

Surety Company: The surety company is the obligor, the company providing the bond.

How Much Does A License Bond Cost?

You will purchase a license bond from a surety company. The price depends on several factors, including your risk level and the amount of your bond.

Your personal credit is the biggest factor contributing to your bond cost. The better your credit, the less you pay; your bond may cost as low as 1% and 3% of the total bond amount.

However, you may pay somewhere between 5% and 15% if your project or business is high-risk, if your credit is poor, or if you have had a claim against a license bond before.

The best way to determine how much your bond will cost is to discuss your options with your surety company.

What Makes a License Bond Different From Insurance?

While they may sound similar on paper, a contractor license bond and contractor insurance are actually very different.

Who is covered?

Your insurance protects you, your license bond protects your customer. Because a bond and insurance cover different parties, it’s highly recommended, and sometimes required by state law, that you have both.

Repaying Bond Claims

Another key difference between contractor insurance and license bonds is the way a claim is paid.

If someone files a claim against your insurance, your premiums may go up but you don’t have to pay the insurance company back. A bond, on the other hand, is more like credit you hold with your surety company. That means you have to pay it back in full if a claim is paid.

Will My License Bond Expire?

Just like your contractor license, your license bond comes with an expiration date.

In California, for example, an active license expires every two years. Inactive licenses expire every four years.

License bonds are valid between one and five years. It’s important to note that your license and license bond won’t necessarily expire at the same time.

Contact your surety company and make sure you know when your bond expires so your coverage doesn’t lapse. Your license and bond may have different expiration dates, so be sure to keep track of both.

How Do I Get a Contractor License Bond?

When you’re ready to get a license bond, you’ll need to submit an application to your surety company. Your application should include your contractor license number or license application fee number.

License bonds don’t need to be complicated. There’s a good chance you’ll need a license bond to get your contractor license. Bond costs vary, and your bond will expire and need to be renewed every one to five years. If a claim is paid out against your bond you are responsible for repaying the surety company the full amount. And that’s the basics of license bonds.

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