• Fri. Dec 9th, 2022

What is a Contractors License Bond and what should you do if a claim is made against you?

ByDeborah C. Lowery

Oct 25, 2022


The surety company will pull your credit and may even consider your financial assets to determine a premium rate.

It could be a fine of just $250.

But that could be a $1,000 fine for the first offense and 30 days in jail.

It could even be a fine of up to $5,000, a misdemeanor charge of up to 6 months in jail.

These are the penalties for an unlicensed contractor in South Carolina, Texas, and California respectively.

Almost all states require a contractor to be licensed to complete residential and commercial projects. Being licensed protects:

– All parties involved.

– Prevents fraud.

– Ensures a standard of professionalism and care.

– Protects the industry as a whole with a set of rules to follow.

In this article, you will learn:

– What is a contractor license bond.

– How this bond fits into your compliance.

– What should you do if a claim is made against your surety.

What is a contractor bond?

A surety bond is a financial product that you, as an entrepreneur, must purchase as part of the licensing process.

There are three parties to the bonding relationship.

– Director

– Obligatory

– Bail

Let’s walk through this process so that you understand the different parts of bonding and how this bonding fits into each job you will take throughout your career.

Bond Requirements

The bond amounts are different from state to state. Yet it will not be a mystery to you. The contractor licensing board or entity will tell you the exact amount of deposit you need to get your license.

For instance:

– South Carolina has a $15,000 bond for home builders.

– California has $25,000 bond.

– Colorado has a bond of $50,000.

Some states have bond amounts based on the level of the project. Every state is different.

How much does a bond cost?

The amounts shown above are bond amounts. It’s not what you’ll pay to get your bond.

Like insurance, what you pay is a small fraction of the “coverage” or in this case the amount. The surety company will pull your credit and may even consider your financial assets to determine a premium rate.

This rate can vary between 1% and 15%. It is unlikely to be more.

If we take the above deposit amounts and a rate of 3.5%, your cost will be:

– South Carolina bond: $15,000 * 3.5% = $525

– California bond: $25,000 * 3.5% = $875

– Colorado bond: $50,000 * 3.5% = $1,750

In this case, it is the annual cost. Below, you will learn more about bond renewal.

Again, your bond broker will help you find the best rate so you pay as little as possible for your bond.

Renewal of Contractor License Bonds

The contractor’s obligations are renewed.

Most states offer continuing bonds that will automatically renew. And depending on the surety company, you can buy a bond for one, two, or even three years.

Your surety broker will help you align your state’s requirements with the options presented by the surety company.

Renewals are not a pressing issue unless the state changes bond amounts. However, make sure you pay your renewal on time or you risk the surety company initiating the cancellation. This can also trigger the suspension or even the cancellation of the license.

The promise you make

By purchasing your bond, you are making a promise to the State and License Board to:

– Follow the rules of your license.

– Act in good faith towards the clients for whom you work.

Remember that a surety bond has three parts:

– The client: You

– The Obligee: The state (and licensing commission)

– The Surety: The company issuing the surety.

Now you should understand what a license bond (bond) is.

What is the impact of an obligation on your career?

Construction worker kneeling in front of a wall; image by Charles, via Unsplash.com.

As a licensed and bonded contractor, you are able to undertake and complete work legally.

Here are three examples and common complaints made against contractors.

1. Incorrect citation of the project

If a contract is signed for a specified amount and the contractor later, once the work has started, raises the price for the owner.

2. Lower Crafting

The contractor is not following the code. And the overall work on site is less than promised in the contract.

3. Incomplete work

The contractor does not complete the work as stated in the contract.

This relationship goes both ways. Not all complaints are legitimate.

What happens if a claim is made against your deposit?

If a customer makes a claim against your deposit, unless he is unscrupulous, he will have informed you of his claim.

Work with your client

Work with your customer and resolve the complaint.

It’s always the best-case scenario. In most cases, you want to exclude third parties from the business relationship.

If you are unable to resolve the issue and the customer issues a claim, it will be for a specific amount of damages. The amount of the claim is unlikely to match the full amount of the bond.

Complaints investigation

The surety company is not happy to pay a claim. An investigator will ensure that the claim is legitimate. That’s why it’s good to work with an A-rated surety company.

If the complaint is legitimate

If the claim is legitimate, the surety company is guaranteed to pay the claim to the client.

Keep in mind that not all claims are legitimate. Customers may make false or inappropriate statements.

This is important… you don’t pay the customer personally. The surety company pays the amount of the claim to the client.

You are now required to reimburse the surety company for the amount of the claim and all costs associated with the investigation process.

Certain complaints may result in the revocation of your contractor’s license. This can make bail harder and more expensive in the future, as your rate will go up.

Remember that it is always best to resolve any complaints directly with your customer. If a customer is unhappy, try not to let third parties get involved.

A contractor’s license bond as a pledge

Being bonded is a promise you make to perform your duties as a licensed contractor.

It’s also a marketing asset because people want to work with bonded contractors. People want to know they’re working with a professional who takes their business seriously.

You now understand what a contractor bond is, why you need to buy one, and how to handle a complaint and potential claim on your bond.

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