Chapter 2: Understanding Construction & Contracting Insurance Policies
Part 3.3: Essential Insurance Coverages: License Bonds / Permit Bonds
Surety Bonds (aka Contractor's Bonds) are a little different than the other types of insurance policies we've discussed so far. First of all, this kind of surety bond exists between three parties:
- The principal (you, the builder or contractor).
- The obligee (or the client that benefits from the bond).
- The obligor (the company providing your bond).
Whereas other insurance coverages protect your business, your License Bond protects the consumers that hire your contracting company. In essence, your surety guarantees that you will adhere to the bond's stipulations and that you agree to adhere to federal, state, and local regulations.
By issuing your bond, your surety provider is vouching for your credibility as a tradesperson. So if government agencies, consumers, or your employees experience a financial loss at the hands of your business, your provider will compensate them for the claim. However, you will be responsible for paying back the full amount of the claim to your carrier.
Say, for example, a client hires your contracting business to remodel the kitchen and you produce subpar work. Or, say you fail to pay an employee for their help on the project, even though you signed an employment agreement. These parties could file a claim over damages. When that happens, your surety provider will cover the claim, but you will be held liable for repayment.
Most states and local municipalities require contractors to carry a License Bond / Permit Bond in order to operate, though regulations vary depending on where you live. To learn what your state or local government requires, feel free to chat with one of our construction insurance experts.
The Benefits of Being Bonded
Though a License or Permit Bond is primarily for the benefit of the general public, you also enjoy some perks of your coverage. A Contractor's License Bond…
- Ensures you comply with state and local laws. You must carry a License Bond in order to operate a contracting or construction business in most states.
- Showcases your business's credibility. Because your provider agreed to back your contracting company, it is vouching that you have the experience to comply with construction regulations and to fulfill the terms of your contract to the obligee.
- Helps you attract work. Clients know that they can trust you to produce professional work.
Many contractors work hard to maintain their good standing with their surety provider so they can continue to be bonded in the future. Any time a claim is brought against your business, it's harder to secure a bond.
How Do I Purchase a License Bond?
The surety provider's obligation is to the general public, which is why the provider carefully "prequalifies" the contractor or builder for the job. To vouch for your experience, skill, and integrity, the surety provider evaluates your bond history and creditworthiness.
When you apply for a bond, your provider may ask…
- Do you have any other surety bonds in force with any other surety company?
- Has another surety company declined to write this or any previous bond?
- Have you ever had a bond involuntarily terminated or cancelled?
- Has there ever been a claim or legal action against any bond executed on your behalf?
- Do you or any of your companies have any pending lawsuits, unsatisfied judgments, or liens?
- Have you or any of your companies declared bankruptcy or become insolvent?
- Have you or any of your companies been the subject of any legal proceedings that resulted in disciplinary action?
Once your surety can guarantee your performance, it will consider your success when you need a bond for future projects. Get started today with a License Bond quote from insureon! Click here to apply online.
Next: Part 4: Endorsements for Contractors & Construction Professionals
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