Contractor License Bond Basics: Just the Facts

Do you need a contractor license bond? If you are interested in learning more about license bonds, there is a good chance you’ve heard through the grapevine that you need to carry one. Before you apply for your own bond, you may have a few questions about what a bond is, why you need one, and how your license bond works.

Here’s the answers to the most frequently asked questions contractors have about license bonds, and the plain facts you need to know.  

What is a Contractor License Bond?

license bond is a type of surety bond. A surety bond is an agreement between three parties: you, your client or entity requiring the bond, and the third-party surety bond company. When you obtain a license bond, you are promising that you will follow all required contractor license laws and required government and local regulations when you do your work.

Who are the Parties Involved with a License Bond?

A surety bond is an agreement between three parties, known as the principal, the obligee, and the surety. Here’s what that looks like for your license bond:

  • Principal: You, the contractor.
  • Obligee: Your State Contractor License Board
  • Surety: The company or person issuing your bond

Who Benefits from a License Bond?

A surety bond ultimately protects the obligee, the person or party who is requiring that you (the principal), carry the bond. In the case of a license bond, the main benefit goes to your State License Board, who is the obligee in this agreement.

How does a License Bond Work?

If you (the principal) fail to follow the required license laws or regulations while you do your work, the (obligee) can go to the company who issued your bond (the surety) for reimbursement of any expenses incurred when you didn’t live up to your agreement.

In other words…

If you are a contractor in California, you must obtain a license bond in order to apply for your contractor license. You go to a company who is authorized to issue license bonds, and obtain one. This bond is your guarantee that you will work as a licensed contractor, will act honestly, and will do your work according to the California contractor license code.

What happens if you don’t live up to your promise?

If your violation of a construction contract leads to damages to a homeowner, or any other person, they can file a claim against you with the surety company who issued your bond. The surety company will then investigate the claim made against your bond, and the CSLB investigates complaints filed against your contractor license.

What Happens if a Claim is Filed Against a Bond?

When a claim is filed against your license bond, the surety company who issued your bond will conduct an investigation and determine if the claim is legitimate. If the surety company determines the claim is valid, you will be given the opportunity to settle the claim. If you don’t respond, the surety company will settle the claim.

However, this is not the end of the issue for you.

Surety bonds are not the same as traditional insurance. If a claim is settled and paid by your surety company, the surety company will then expect you (the principal) to reimburse them for payment of that claim.

Here is the biggest motivating factor to do your work in accordance to your state’s license laws and regulations; if a claim is filed against you for not doing so, you will pay for it in the end.

Which Contractors Need a License Bond?

Generally, any contractor who is applying for a new license, reinstating a suspended license, or renewing an active license will need a license bond. The license bonds may vary from state to state, so check to see what states require a contractor license bond. For most contractors, however, a current bond is a must to get or keep a license.

When do You get a License Bond?

Different states may have different requirements for when you should get a license bond. Generally, you will generally obtain a license bond before you get a new contractor’s license, reinstate a suspended license, or renew an active license.

Your license bond itself will need to be periodically renewed, and that may not be at the same time your contractor license needs to be renewed. Once you have your bond, pay attention to renewals dates so you can stay current.

Where to get a Contractor Bond

License bonds should be obtained through a surety company or agency licensed by your State Department of Insurance. An insurance agency, such as Hunter Insurance Services, who specializes in contractor bonds and insurance can get you bonded quickly and easily.

More Contractor License Bonds FAQs

Still have questions about your license bond? Here are some of the questions we often get from contractors like yourself.

What’s the Difference between a Bond and Insurance

Contractor insurance and contractor bonds can be confusing. One of the big differences between a bond and insurance is who benefits from the protection. A license bond protects your customers, while insurance protects you (or your company).

Claims are another area that differentiates bonds from insurance. If a claim is filed against your insurance, you may see a rise in your premiums but you are not responsible for paying your insurance company back for that claim amount. When a claim is filed against your bond, however, the surety company will expect you to reimburse them if they have to pay out an obligee.

What Happens if I Work without a License or Bond?

If you live in a state that requires a license bond, such as California, you cannot get your license without first obtaining a license bond. And if you operate illegally without a license, you risk both financial and criminal charges for doing so. The cost of obtaining a license and bond is much less in comparison to potential jail time and big fines.

How Much Does a Bond Cost?

The cost of a license bond, known as the premium, will be based on a number of individual factors, including your credit score, years of experience, and other factors. Generally speaking, a bond will cost between .5% and 3% of the bond amount. In California, the amount of a license bond is $15,000.

Do I Need Good Credit for a Bond?

A low credit score does not necessarily mean you can’t get a license bond. Factors such as pending lawsuits, bankruptcy filings, and previous bonds held are also taken into consideration when you apply for a bond.

Where Can I Find More Answers?

If you have specific questions about whether or not you need a license bond, how much a bond will cost you, or when you need to renew your bond, you can contact a contractor bond specialist at Hunter Insurance Services to learn more.

Feeling good about the ins-and-outs of bonds, and ready to get yours? Apply for a contractor bond now, get an instant quote, and be bonded in no time at all.