When you purchase a contractor license bond in California, you will sign an indemnity agreement as part of the bonding process. If you are in the process of getting a license or just beginning to research license bonds, understanding the indemnity agreement is crucial. When you sign the agreement, you are signing a legally binding contract that could cost you in the event of a claim.
What is a Contractor License Bond Indemnity Agreement?
When you sign an indemnity agreement, you are agreeing to repay a surety company if they have to settle a bond claim against you. You are saying you will indemnify, or make whole, the surety company for the amount of a bond and claim as well as for other costs, such as attorney fees.
Many times contractor bonds and insurance are lumped together into one category. They are both essential to your profession, and offer financial protection from losses. But the indemnity agreement is the element that really sets bonds and insurance apart.
Let’s take a look at the difference between the two.
Contractor Bonds vs. Insurance
When you get insurance for your contractor business, you are paying an insurance company to shield you from the full impact of a financial loss from an unexpected event. For example, you pay a monthly premium for commercial auto insurance coverage. In return, you don’t have to worry about the full financial impact if you are involved in an auto accident while driving your work truck to a job site. You will pay the deductible that you and your insurance provider agreed on, and your insurance company will pay the rest of the cost of vehicle repairs or medical bills for injuries -- up to your policy limits.
In other words, your contractor insurance protects you from major financial losses.
Contractor bonds, however, are put in place to protect other people from financial losses.
As we’ve already mentioned, if you want to get your contractor license in California you are required to purchase a license bond. This bond is a three-party contract in which you guarantee to follow all required contractor license laws and required regulations when you work.
How do license bonds work?
To get back to simple license bond basics: if you violate a state law violation which financially harms one of your customers or employees, a bond payout may occur if an investigation finds the claim against you is valid.
Here’s where your bond is significantly different from an insurance policy:
When you sign an indemnity agreement which promises you’ll pay the surety company back if they pay out a claim against you…
You are responsible for paying the full amount of the bond.
And that’s not all.
You are also responsible for repaying any and all of the costs associated with payment of your claim, including attorney’s fees, expenses, damages, and any liabilities the surety company may incur as a result.
A license bond is not an insurance policy.
Actually, a surety bond is almost like having an available line of credit open in the event something goes wrong. If a payout occurs, the surety company pays the full amount owed, and then you reimburse the surety company -- just like repaying a loan. And, like any other loan, you will have to pay the surety company back.
A contractor license bond benefits your customers or employees if they are financially harmed as a result of your business operations. Which is why Contractor State License Boards often require contractors to obtain a bond as part of the licensing process. If you’re not sure if you need a bond to get licensed, see our list of which states require license bonds.
The ultimate purpose of an indemnity agreement is to clarify your rights and responsibilities in the event of a claim.
It’s always a good idea to understand what you are signing, whether it’s a contract for work, an insurance policy, or an indemnity agreement as part of the bonding process. Understanding how an indemnity agreement makes a bond different from an insurance policy can help you avoid a claim that could be costly - to you, not the surety company.