What Is a Contractor License Bond, and Why Is it Needed?

License bond wide

Contractor license bonds are a crucial aspect of the construction industry, as they are a legal contract that can have serious financial ramifications if not taken seriously.

What Is a Contractor License Bond?

First, let’s discuss the basics. What is a contractor license bond? It is a type of surety bond that demonstrates the professional’s compliance with applicable licensing laws and regulations. If the contractor fails perform certain aspects of the work, a claim can be made against the bond, and the bonding company would be responsible for compensating any affected parties up to the amount of the bond.

Who Is Involved in a License Bond?

There are usually three parties involved in a license bond. First is the principal, who is required to get the bond. In the case of a license bond, the principal would be the contractor. Then comes the obligee, or the government entity requiring the bond.

Finally, there is the surety. This financial services company that issues the bond assures that if the contractor (the principal) violates state licensing laws or regulations, then the surety may compensate the claimant if the principal fails to do so, up to the limit of the bond.

How the Bond Usually Works

The specific requirements for a contractor license bond vary depending on the state and the type of work performed. Some states require a bond for all contractors, while others require it only for certain types of work or contractors. The bond amount can also vary depending on factors such as the contractor’s size and scope of work, the state in which they operate, and their credit history.

It’s usually a simple and quick process to obtain a license bond, as long as your credit is in good shape. Most license bond premiums are paid annually, and bond can be reviewed. Ask your insurance agent for assistance with securing the bond that is right for you.