A contractor license bond is an agreement with a surety, often a large insurance carrier, that provides financial backing to the contractor for fulfilling the terms of a project agreement with a client.
Unlike a standard insurance agreement or a traditional loan, bonds have three distinct parties. These bonds have essentially the same structure. The primary party is referred to as the “principal.” The principal is obligated to complete a task or conduct business following specific regulations.
The “obligee” benefits from the principal’s business. The general public usually falls under this category, but it could also be an entity that requires a project to be completed.
If the obligee feels the principal hasn’t fulfilled the contract terms, a claim can be filed against the bond for financial compensation to satisfy the damages.
The party that provides the compensation when there’s a claim filed is the “surety.” This entity guarantees that the contractor will satisfy their agreement with the obligee. This agency assesses the principal’s qualifications before agreeing to the bond.
The surety will provide a contractor license bond guaranteeing financial responsibility once the surety finds the principal capable of fulfilling their agreement or remedying potential contract breaches.
Contractor License Bonds
City, county, and state governing agencies require a contractor license bond. It is typically required for anyone considering licensure as a contractor. The bond amounts vary for each state, ranging from $1000 to $50000+.
These bonds guarantee that contractors will conduct business according to the regulations required by the governing body that mandated the bond.
If the laws are violated, a claim can be issued against the bond, and the surety that guarantees the bond will be responsible for the amount that can equal up to the bond amount. When the surety is forced to pay a claim, the contractor will then be accountable to the surety for that amount.
From an obligee’s standpoint, a contractor license bond incentivizes the contractor to follow the regulations and adhere to codes of conduct. It encourages adequate work, fewer mistakes, and avoidance of behavior that could risk people’s safety, health, and finances.
The principal finds the bond an essential component in their work as it shows their willingness to be accountable for their projects.
It ensures contractors establish credibility and trust with their clients and allows them to attract new leads as professionals in their industry. Go here for the fundamentals on contractor license bonds.
Claims Against the Contractor License Bond
The surety doesn’t pay outright when a claim is filed by an obligee. It first performs a comprehensive investigation to discern when the claim details are legitimate. If they have merit, the surety will pay without delay, but this doesn’t satisfy the contractor’s debt.
The debt transfers to the surety from the obligee. The surety will then use legal recourse to collect the amount paid from the principal in addition to all interest and fees for the expense, including the investigation costs.
It’s almost always less costly for the principal to settle disputes with the obligee to avoid the potential for a claim to be filed against the surety.
Costs For Contractor License Bonds
The rates for contractor license bonds vary based on a few variables, with credit being a primary consideration and financial status often having some bearing. Often, the lower your credit score, the higher the quote for the bond.
Surety underwriters will use your details to try to get the best rate. If you renew and your details improve, the bond can be “remarketed” for better rates.
The contractor’s claim history is another consideration when deciding the bond’s cost. Those with prior bonds that have claims can expect a more expensive newly issued contractor license bond because the surety will view you as a high risk.
Visit https://seaislenews.com/determine-exact-surety-bond-amount-required-general-contractor-license/# for guidance on determining the surety bond amount for a general contractor license.
If these claims were left unpaid with the surety taking a loss, obtaining a bond that the obligee will agree to is virtually impossible. The recommendation for keeping costs to a minimum is to avoid claims altogether.
Renewing A Contractor’s License Bond
Most contractor license bonds are active for a year before they must be renewed. Not renewing your license will result in the loss of your license. It is crucial to renew, or your business will be rendered illegal. When renewing, the premium typically must be paid again.
That means reevaluating your credit standing. If your credit score has improved, it could lower the premium amount. Contractors should budget the premium, annual renewal costs, into their operating expenses.
The recommendation is that contractors understand that licensing and bond renewals can fall on different schedules. That can create confusion. Still, pay attention to the notifications you receive and follow the instructions to ensure deadlines are met.
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