How Does a Contractor License Bond Claim Work?

If surety bonds confuse you, you’re not alone. There are many different types of surety bonds, and different reasons people might make a claim against them.

So what do you do if someone makes a claim against your bond? Read on for more information on the claims process, and discover how a claim could impact your business.

When a Claim Is Filed Against Your Contractor License Bond…

One type of surety bond is required by law in most states: a contractor license bond.

A contractor license bond, like other surety bonds, is like a form of insurance for your customer. It’s an agreement between the contractor, the surety company, and the state license board that promises that the contractor will follow all state laws and regulations. If something happens and the contractor doesn’t do their job, the customer can make a claim against their bond for reimbursement.

Here’s what to expect if a claim is filed against your bond:

#1: A claim is filed.

A license bond is a guarantee. It promises your customers that you’ll follow all licensing laws and regulations while you do your job. If you don’t live up to this agreement, your customer, or anyone else who suffers damages because of a wilful violation of your contract, can file a claim with your surety company.

When you begin a new job your customer should ask you for your bond number and certification. Should something happen, they can then use that information to file a claim with your surety company.

#2: The surety company investigates the claim.

When someone files a claim against your bond, your surety company will investigate its validity.

There are a number of different steps the surety company can take to gather the information they need, including:

  • Collecting statements from both the contractor and the client.
  • Examining the project contract to determine if there was a breach in the contractor’s agreement with the customer.

For example, if a customer complains that you haven’t completed the job in the timeframe you initially agreed to, they may file a claim. If the surety company finds out that the customer issued 30 change orders to the contract that extended the timeline of the project, your surety company may then declare that their investigation determined that you weren’t in default under your contract. In other words, you weren’t at fault.

#3: The claim is paid.

If the surety company finds that the claim is valid, they have a few options. They may find a new contractor to complete the job, or pay the claimant for the damages suffered. If the company does decide to pay the claimant, they will pay the determined sum quickly.

#4: Contractor repays the surety company.

After the claim is paid, you will reimburse the surety company. Think of your surety bond as credit- when a claim is made against the bond, you’re responsible for paying it back.

This is one area where your contractor bonds vary a great deal compared to your contractor insurance. When your insurance company pays out a claim, you are responsible for a portion of the claim: your deductible. However, when a claim is payed out against one of your contractor license bonds you are responsible for repaying the surety company for the entire amount.

The surety company will set the terms for repayment. If you want to know how you’d be required to pay off a claim, read through your indemnity agreement. Depending on the terms of your agreement, the bond company will allow you to pay them back in smaller payments, which may make the incident much more affordable for your business.

How Will a Bond Claim Impact You?

So what happens after a claim is filed against your bond? Are their repercussions other than financial?

If the claim is valid…

Once you’ve paid a surety claim, it will be much harder to become bonded again in the future.

Whether or not you’ve had a claim before is a standard question on bond applications and may lead to your application being declined.

If the claim is dismissed…

If the surety company’s investigation shows that the claim is invalid, then the claim doesn’t need to be paid and all’s well that ends well.

What Comes Next?

Could you lose your license?

The California State License Board operates independently of surety bond companies. You have to have a license bond to be a licensed contractor in the state of California. Someone can file a claim against your bond without filing a claim against your license, or vice versa. The surety company and the state license board will conduct independent investigations into the matter.

Often, however, issues involving one entity will involve the other. Your surety company will decide if they will pay the claim, and the license board decides if disciplinary action is needed.

Because your license bond guarantees that you will follow the regulations the licensing laws and regulations, if you are found to be at fault it means you’ve broken a law or regulation. If the infraction was serious enough, it could result in you losing your license.

Can my bond be canceled?

Surety bonds are often written for a certain period of time, typically between 1 and 5 years. If you don’t pay your dues or don’t renew your bond in a timely manner, it may be canceled. If your bond is canceled, your license will be revoked.

Furthermore, your surety company can cancel your bond if you violate any of the terms set out in your bond agreement. It’s important to read through your agreement before signing it to make sure you understand all of its conditions.

Will I be able to get another bond in the future?

Having paid a claim on a license bond before may make it harder for you to get a bond in the future. If you do have a prior bond claim on your record, you may expect to pay a bit more for your next surety bond.

For example, where you may have once paid between 1% and 3% of the total bond amount, you may now have to pay between 5% and 15% of the bond amount.

Even if you live in a state where being bonded isn’t required by law, having a contractor license bond is important for the safety of both your business and your customers. Your customers stake a lot of money on your services, and if you don’t honor that commitment they’re at risk for significant financial losses.

Having a license bond does more than assure them that their financial risk is covered, it shows your commitment to high-quality work.

If something does happen and a claim is filed against you, a license bond will keep both you and your client safe.

Do you have any other questions on license bond claims? Don’t hesitate to contact our team of experts- we’re happy to help!


9855 Prospect Avenue - Suite D
Santee, CA 92071
Phone - 888.815.7639
Fax - 619.465.1926
CDI # OD94594