What does it mean to be "Licensed, Bonded, and Insured?"

A: A construction business or contractor that is licensed, bonded, and insured sets itself apart from other companies as professional and trustworthy. With its licenses and bonds, it has verification from the state or local government or state that it will comply with government construction standards. These businesses also have insurance coverage that can protect against potential lawsuits.

When you see other construction professionals advertise that they are licensed, bonded, and insured, you've probably wondered what those terms mean and whether you needed to get bonded.

To understand why other contractors and construction professionals market their businesses this way, let's take a look at what each of these terms means:

  • Licensed. When a construction professional advertises that they are licensed, it means that they have a contractor's license or other relevant professional license (e.g., electrician's license). Not all states or local governments offer a contractor's license. But if one is available in your area, you should look into it. In addition to adding a sense of professionalism to your business, a license can actually protect you. In some states, having a license can help you collect damages when a client refuses to pay.
  • Bonded. A bonded contractor has a Surety Bond, which often goes hand-in-hand with getting licensed or signing up for a building permit. When you apply for a state license, you'll have to purchase a License and Permit Bond from an insurance company or bond agent. Before they license you, governments want reassurance that you won't breach the law and will follow all appropriate building regulations. These bonds guarantee that you'll pay financial damages to the government if your work doesn't meet license and permit standards and the government is sued. (See "How Does a Surety Bond Work" for more details).
  • Insured. When a contractor advertises that they are insured, it usually means that they have General Liability Insurance. Customers often want you to have GL Insurance because it pays for lawsuits over problems with your services. If a plumber botches an installation and causes a leak, the customer could sue. In that event, GL Insurance would cover the plumber's legal expenses and pay for damages they owe the customer.

As a construction or contracting business owner, marketing yourself as licensed, bonded, and insured demonstrates that you are a dependable business that has the financial stability required to deliver contracts. It reassures clients that you know the laws and are committed to following them — and if something goes wrong, they'll have a way to collect damages.

That's a load off your customers' minds. Getting bonded, licensed, and insured will go a long way to winning customer trust.

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