A contractor license bond is a type of surety bond that contractors need to do business. Often required by government agencies, this bond helps to ensure you’re not doing something you really shouldn’t — like failing to complete a project or committing fraud.
Getting bonded is often part of the licensing process, so you’ll likely need one as a contractor. Keep reading to learn how they work, the requirements, and where to get one.
● Definition and Examples
● How It Works
● How Much It Costs
● Types of Contractor License Bonds
● Where to Find & How to Apply
● Frequently Asked Questions
A contractor license bond is a surety bond that a governing agency (usually a state/local municipality) requires for becoming a licensed contractor. These bonds protect the general public by requiring contractors to comply with the law and industry-specific regulations. The requirements can vary by the state and your industry.
As with any type of surety bond, a contractor license bond involves three parties:
● Principal: The contractor that needs the bond (you)
● Obligee: The party that requires you to obtain the bond (government agency)
● Surety: The company that issues the surety bond and guarantees the obligee that you comply with regulations
Let’s say a homeowner agrees to work with a construction contractor to make some home improvements. Two months in, the contractor goes MIA and never finishes the work. The homeowner files a claim against the contractor license bond and the surety approves the claim, reimbursing the homeowner for their financial loss.
A claim can also occur within the company. Let’s say a contractor’s employee is entitled to fringe benefits but the company refuses to pay. The employee files a claim because their employer is violating labor laws. The surety approves the claim and the employee receives financial recompense.
Governing agencies enforce contractor license bonds as a way to protect the public against bad contractors. When the surety issues a surety bond, they are guaranteeing that the contractor will follow all laws and regulations, or risk penalties.
Examples of covered incidents under a contractor license bond include:
● Failure to complete work
● Not finishing the work on time
● Exceeding the agreed-upon budget
● Violating building codes
● Damage to property
● Failure to properly compensate eligible employees
● Violations of state license laws
● Poor workmanship
Should somebody file a claim against the bond because you did something listed above, then the claimant can be reimbursed up to the bonded amount.
Now, let’s learn more about the actual bond. There are three important characteristics — capacity, premium, and term:
● Bonding capacity: The highest amount a wronged party can claim — also called bond amount (e.g., the amount claimed on a $15,000 bond cannot exceed $15,000).
● Bond premium: How much the bond costs. Premium is calculated as a percentage of the bonding capacity (e.g., 3% premium on a $15,000 bond costs $450).
● Bond term: How long the bond lasts. Many terms on contractor license bonds are one year and you would need to pay to renew the term.
What Happens When a Claim Is Filed?
If the client feels their contractor violated their contract or a law, they can file a claim with the state agency that required the bond (obligee). Unlike other types of surety bonds, two parties are involved in the investigation — the state agency for claims against your license and the surety for claims against the bond. Both matters are usually related, but the investigations are done independently.
If the claim is found to be false, then you’re in the clear — no further action needed on your part.
But if the claim is true, then the surety reimburses the claimant for losses and damages up to the bonded amount.
Keep in mind that a surety bond does not function like general liability insurance. The surety pays the claimant on your behalf, but you’re still financially liable. Any amount the surety paid out to the claimant becomes a debt that you owe the surety.
For example, if the surety paid $10,000 on an approved claim, you now owe the surety $10,000.
How Much Does a Contractor License Bond Cost?
Premium on contractor license bonds can range from 0.5% to 10%. Several factors can determine the premium, such as:
● Industry: High-risk professions, like roofing contractors, can carry higher premiums.
● Credit score: Lower credit scores typically lead to higher premiums.
● Business qualifications: Time in business and the quality of your business finances can affect how much you pay.
Of course, the best way to pinpoint your out-of-pocket cost is to obtain a quote from the surety. Grab your free no-obligation quote from Worldwide Insurance, Inc. today.
There are many types of contractor license bonds — from state and local-required bonds to industry-specific bonds, like plumbers and electricians. Some common types include:
● State/municipal contractor license bonds
● General contractor license bonds
● Electrical contractor license bonds
● Landscaping contractor license bonds
● Plumbing contractor license bonds
Requirements for a Contractor License Bond
Start by reviewing the bond amount requirements enforced by your state. For example, contractors need to be bonded anywhere from $1,000 to $500,000 in Nevada, but only $15,000 in California.
Quick note: The bond amount applies to all jobs performed within the bond term — not just one job. The $15,000 bond in California, for example, could cover 50 jobs if completed within the term.
Contractor license bond applications are not universal. Each governing agency typically has their own form and you will need to file using the correct one. Here is a sample contractor license bond form that a contractor in Arizona would use.
Contractor license bonds are typically available through insurance companies. Be sure to work with an experienced surety who understands the bonding process AND the requirements based on your company, industry, and location.
Applying for a Contractor License Bond
Obtaining a contractor license bond is easy when applying with Worldwide Insurance, Inc. Just fill out our initial application form and get an instant quote in minutes. With rates starting as low as 1%, we issue all types of surety bonds in all 50 states. No credit check required and no obligation.
A contractor license bond is a type of surety bond specific to contractors. Getting bonded is often part of the licensing process and is required to protect the public against bad contractor practices, like incomplete work or poor workmanship.
A wronged party can file a claim against a contractor’s license bond for bad or dishonest practices, such as incomplete work, violation of license laws, fraud, poor workmanship, and more.
Very likely. Becoming bonded is often part of the state licensing process. Even with no statewide requirement, local municipalities can have their own bonding requirements.
How much is a contractor license bond?
Premiums on contractor license bonds can range from 0.5% to 10%. They are typically based on your industry, credit score, license history, time in business, and experience.
When a claim is filed against the contractor license bond, the surety typically provides the contractor an opportunity to resolve the claim on their own. If a resolution is not possible, the surety will investigate and collect information from each party. If the surety discovers the claim is false, the process ends and no further action is required from the contractor.
Most contractor license bonds carry terms of one year and you would need to pay another premium to renew the term. Failure to renew your bond can be a violation of a state or local regulation, resulting in the loss of your license.
Can I get a contractor license bond with bad credit?
Yes, Worldwide Insurance, Inc. works with thousands of contractors — even those with low credit — to help them meet their bonding requirements. If you need a surety bond for your contractor license but have bad credit, we’ll still work with you.
What kind of bond does a contractor need?
Visit our list of bonds by state to get a closer idea of your bonding requirements. To learn more about surety bonds in general, check out our free surety bond guide.