Contractor license bonds can be confusing if you’re new to the business, but they don’t have to be. We’ve got the answers to your most pressing license bond questions. What is a license bond? Do you really need one? Isn’t a bond just the same thing as insurance?
Read on to find out what exactly a license bond is and how to get yours.
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 Does A License Bond Work?
A contract license bond is an agreement between you, your surety company, and your client. It insures that you will follow all state laws and regulations. The claims process for a license bond is fairly straightforward:
If something happens and you are unable to do your job properly, the client can file a claim against your bond for compensation.
If the claim is valid, the surety company will reimburse the client for their losses. The contractor then repays the 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 for two key reasons.
#1: A license bond and contractor insurance cover different parties.
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.
#2: Unlike insurance, you have to repay claims made against your bond.
Another key difference between the two 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.
Do I Need A License Bond?
A license bond is called a license bond because it’s 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.
From Alabama to California to Mississippi to Wyoming, the list of states that require a license bond is fairly extensive.
Bond requirements and regulations can vary widely from state to state.
For example, in California 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.
Make sure you understand the bonding and licensing requirements in your region.
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 Much Does A License Bond Cost?
You pay your surety company to obtain your license bond, and after that you will reimburse your surety if a claim is filed against the bond.
Different surety companies will quote you different rates for your bond. How much your bond costs depends on several factors, including your risk level and the amount you need to be bonded for.
The amount you pay for your bond will depend in part on your personal credit. The better your credit, the less you pay. You may receive a quote as low as 1% and 3% of the total bond amount.
However, 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, you may pay somewhere between 5% and 15%.
The best way to determine how much your bond will cost is to discuss your options with your surety company.
How Do I Get a Contractor License Bond?
We’ve got good news: you don’t have to wade through weeks of paperwork to get your license bond.
Here’s how to get a contractor bond fast:
Submit an application to your surety company. This application should include your contractor license number or license application fee number.
Hunter Online offers instant license bond quotes. Your bond will be issued as soon as you submit a payment.
Hunter will automatically report your bond to the California State License Board.
It’s that easy.
Will My License Or Bond Expire?
Both contractor licenses and contractor license bonds expire.
An active license in the state of California expires every two years. Inactive licenses expire every four years. The California State License Board will notify you 60 days before your license expires, which should give you plenty of time to renew it.
Your contractor license bond will also expire. License bonds are valid between one and five years, depending on the surety. 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.
Ready to get started?
If you need a bond fast, submit your instant issue license bond application.
If you have any questions or concerns, feel free to contact one of our insurance and surety bond experts now. We’ll make sure you have all the information you need to get your license bond at a great rate.