What Is a Contractor’s License Bond?

Posted: April 30, 2019

A contractor’s license bond is a surety bond categorized as a license and permit bond. These bonds are required as a condition of obtaining a contractor’s license to operate in a given state or municipality. The purpose of the bond is to ensure that construction contractors operate in a lawful and ethical manner, which protects the state or municipality and consumers from financial loss due to the actions of a contractor. Learn more below, and request a quote from Contractor Surety Group today.

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Who Needs Them?

Some states license construction contractors at the state level, but others don’t. Whether or not a state contractor’s license is required, some municipalities within the state may have their own rules and regulations regarding contractor licensing.

When contractor licensing is mandatory, there may be different classes of licenses for different types of contractors and different construction specialties, such as electrical, plumbing, or HVAC. You’ll need to check with your state and local governments to determine what licensing and bonding requirements may apply to contractors in those jurisdictions. Or, simply speak with an experienced Contractor Surety Group agent.

How Do They Work?

Any surety bond is a contract between three parties: the entity requiring the bond (the obligee), the party purchasing the bond (the principal), and the company underwriting and issuing the bond (the surety). In the case of a contractor’s license bond, the obligee is the state or municipal licensing board or agency, the principal is the contractor obtaining the bond as part of the licensing process, and the surety is the company issuing the bond to the contractor.

The terms and conditions of the bond establish the rules, regulations, and standards the contractor must comply with. Any actions of a contractor that violate those terms and conditions can lead to a claim against the bond by any party who has suffered a financial loss as a result of those actions.

What Happens When A Claim Is Filed?

When a claim is filed against a contractor’s license bond, the surety will conduct an investigation to determine the validity of the claim. If the claim is deemed valid, the claimant will be paid up to the full penal amount of the bond.

As a courtesy to the claimant, and to give the contractor some time to marshal the resources to pay the claim, the surety will make the payment initially, then collect reimbursement from the principal. Note that the principal is ultimately financially responsible for all claims against the bond and must repay the surety for any claims paid. In some cases, a contractor’s license bond may allow the principal to repay the surety in installments over a specified period of time.

What Do They Cost?

The required bond amount, known as the penal amount of the bond, is established by the obligee. This amount can vary widely from state to state. The contractor pays a premium that is a small percentage of that bond amount. For contractors with good credit, that can be as little as 1% to 3% of the bond amount. Contractors with poorer credit will likely pay a higher premium.

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Contractor Surety Group is an underwriting agency specializing in P&P bonds for developers/GCs including LIHTC (4% & 9% deals), market rate, HUD 221 (d) (4), and state-based programs. Make us your one-stop shop for all of your construction bonding needs.

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