In an effort to help consumers better understand the niche surety industry, Insider contributors have created a 7-part series answering the most popular questions about surety bonds. Check out the first and second parts. In Part 3, we’re going to define and explain contractor bonds.
What is a contractor bond?
Contractors obtain contractor bonds in order to get licensed. They ensure the contractor will obey all applicable contracting laws in their state, county and city.
Have you ever heard a business or individual advertising that they are “licensed and bonded” or “bonded and insured” and wondered what the “bonded” part was all about? While surety bonds are often a licensing requirement, those phrases are good news for consumers.
To legally conduct business as a contractor in most states, you must be licensed and insured. Though requirements vary, many states requiring a contractor’s license also require the purchase of a surety bond. Learn exactly what a surety bond is in the previous installment of this series.
The contractor bond’s purpose is simple: to protect consumers in the event that the contractor violates any contracting laws applicable in the state, county or city. If they do violate those laws, consumers can file a claim against the bond for reparation. The surety company will pay out proven claims up to the full amount of the bond (for example, a $5,000 claim on a $50,000 bond would be covered in full). Unlike insurance, where liability lies with the insurance company, the principal is on the hook in this case and must reimburse the surety company.
What if my contractor isn’t bonded?
First, check contracting laws in your state, county, and city. Sometimes, surety bonds are not required. However if you find that your area’s laws do require a bond, your contractor cannot legally conduct business without it. If that contractor were to violate contracting laws resulting in a financial loss for you, there would be no guarantee of compensation. The bond assures that the contractor will perform his job to the best of his abilities—and if he doesn’t, you won’t lose money.
As important as it is to make sure your contractor is bonded, it’s equally important to verify that he is licensed as well (if the law dictates). Operating without a license can place further liability on you, the property owner. And if a contractor hasn’t obtained a license, it’s likely there are other laws he’s ignored as well.
Contractors usually must have workers’ compensation or general liability insurance. If an unlicensed, uninsured contractor or employee is injured in your home, you might be on the hook for the damages. If your state requires contractors to be licensed, you can contact the appropriate government department to verify that your contractor is licensed. Always ask to see proof of license, insurance, and bond before hiring a contractor.
For more information regarding contractor bonds in your state, check out the SuretyBonds.com Guide to Contractor Bonding. Stay tuned for the fourth installment in the series detailing how to get bonded and insured.