Understanding Contractor License Bonds - Everything You Need to Know

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Understanding Contractor License Bonds

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Understanding Contractor License Bonds

Contractor License Bonds are a type of commercial surety bond that assures the state requiring the bond and the general public that the contractor will adhere to state licensing regulations and statutes. This is a legally binding contract that protects the owner of a project and the general public from a contractor who provides faulty or incomplete work fails to pay specific permits, suppliers, or workers or doesn’t adhere to the contract specification. A contractor license bond is often required to obtain a contractor license legally. Most government-related building projects require contractor license bonds as a way to protect the local, state, or federal government from losing money on a project due to a contractor’s inability to adhere to the requirements set in the initial contract.

Contractors required to obtain a contractor’s license bond must meet all specifications in order to qualify for the bond. The surety will only underwrite a contractor license bond if the contractor is in good standing with the surety, his/her credit is approved, and the contractor has solid financial backing and quality work history.

Who is Required to Obtain a Contractor License Bond

In most states, the contractor licensing department makes it mandatory that certain or all licensed contractors operating a business secure a surety bond. This type of bond assures the public that all licensing statutes and regulations are being adhered to by the licensed contractor. A contractor license bond is ultimately another form of insurance provided by the surety.

What is a Surety Bond

A surety bond is an agreement that legally binds the 3 involved parties together — The Principal, The Obligee, and the Surety. A surety bond guarantees that the principal will adhere to all laws and regulations specific to the bond and industry. If the principal fails to meet the requirements of the purchased bond, the obligee can make a claim against the surety bond to ensure no financial loss.

The Three Parties Explained

The Principal:

This is the person required to obtain the surety bond. The principal will adhere to all laws and regulations in accordance with the surety bond. In regards to a contractor license bond, a contractor is the principal required to obtain the surety bond.

The Obligee:

This is the person or party who is the recipient of the obligation. This means that if the principal fails to comply with the surety bond requirements and regulations, the obligee can make a claim against the surety bond, or in this situation, make a claim against the contractor license bond.

The Surety:

This is the party that assures the obligee that the principal can in fact perform the tasks associated with the surety bond. The surety guarantees the performance or obligations of the principal, and if the principal fails to meet said obligations, the surety will provide the appropriate compensation to the obligee which will eventually be repaid by the principal.

FAQs for Both the Principal and Obligee

Why is this bond required?

Some may be wondering why this bond is required if you are already insured. The answer is simple. A contractor license bond assures the state requiring the bond and the public that the contractor will abide by the respective state’s licensing rules and regulations. Because every state has different laws and regulations, a contractor will likely need a contractor license bond for each state they are working. Many contractors work nationwide, working on multiple projects at one time. This means that the correct state bond is necessary for each project. Find your specific state contractor license bond below in the US map.

This type of surety bond is basically a form of insurance for other people. The contractor is required to obtain the bond in order to protect the person he/she is working for.

What Does A CLB Cover?

A contractor license bond covers the obligee from any financial loss. If a contractor fails to complete a job, provides faulty work, fails to pay suppliers or doesn’t get the right permits for the project, a claim can be made against the contractor license bond. For example:

If a contractor decides to leave town before the project is finished in full and meets all requirements as agreed to in the original contract, the obligee can make a claim to the surety against the contractor license bond. If the claim is approved by the surety, the obligee will be provided the appropriate compensation to finish the work. The goal is to ensure no financial loss for the obligee based on the contractor’s behalf.

What does the claims process look like and how long does it take?

The claims process can go one of two ways:

  • The obligee will make a claim against the bond and an investigation by the surety will be performed. If the surety finds that the claim to be invalid then the investigation will conclude. The obligee may be required to pay any expenses the surety incurred during the investigation.
  • The obligee will make a claim against the bond and an investigation will occur by the surety agency who wrote the bond. If the surety concludes that the claim is valid, the principal will be reminded of the obligations agreed to under the bonded contract. The Principal then has the opportunity to respond to the claim with a defense or resolution to the claim.  — It is important that the principal respond to the claim and attempt to resolve the issue as quickly as possible. A claim against a bond can be detrimental to the contractor’s future business opportunities. Failure to respond will result in the surety taking legal action against the principal for reimbursement of the payout to the obligee and all legal fees associated to the claim.

FAQs for the Principal

How much will a Contractor License Bond cost?

The cost associated with a contractor license bond varies greatly. Each state and license type carry different obligations and bond amounts. It can also depend on what type of work the contractor performs and how much work they do. Generally, you can expect to pay 0.5%  to 3% of the bond amount. Almost all of these bonds can be instantly issued or quoted without running credit. Reach out to one of our agents today to get your bond quoted and issued.

How do I know if I need a Contractor License Bond

Every state has different regulations when it comes to obtaining a contractor license. Many require that a CLB is obtained prior to applying for a contractor license. Check your state’s contractor license specification for more information.

How often are Contractor License Bonds Paid?

Typically a contractor license bond is paid annually. Your surety agency will send you a repayment reminder up to 90 days before the bond is up for renewal. It is at that point that you can decide to renew or shop around for a better rate. Here at Bonding Solutions, we provide the lowest rates available and work with you to ensure the bond coverage is exactly what you need to help grow your business.

Do CLB’s Renew Automatically?

All surety agencies will notify the contractor prior to any automatic renewal. It is important that the contractor have the option to revisit the bond, bond cost, and premium before renewing.

How long does it take to get a Contractor License Bond?

Quotes for a contractor license bond can be provided within hours of inquiry, often without running a full credit check. To obtain the actual surety bond, it is important to provide your surety agent with the correct financial information from the start to ensure a quick approval process. If all financials provided check out, we have the ability to underwrite contractor license bonds on the same day as the inquiry was made. The Bonding Solutions Team has the resources to provide you with fast approval at an affordable rate. We are the leading provider for contractor license bonds nationwide.

How Can I Qualify for a Contractor License Bond?

Qualifications for a CLB differ from state-to-state but in general, bond approval is fairly simple. With good credit, good bond history, and the appropriate financials, we can help you get qualified for a contractor license bond at an affordable rate.

FAQs for the Obligee

How Do I make a Claim Against a Contractor License Bond?

As the obligee, it is your right to make a claim against the contractor license bond if you feel that the contractor did not adhere to the contract in any way. Simply contact the surety company that was responsible for writing the bond and make your claim, detailing any issues that occurred.

As the Business Owner, do I need a Bond?

As the business owner, you may require a bond in order to operate your business legally. For a full list of the bonds we offer, click here!

About Bonding Solutions

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Need a bond for a construction project?

If you need a bond for a construction project it is most likely a bid, performance, payment, site development, or supply bond.

Please visit our contract bond page below:

Contract Bonds – for construction projects

 

 

published on Wednesday, August 19th, 2020

 

Questions?

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