Building a Sturdy Business
How (and Why) to Get Bonded and Insured as a Contractor

So you have your tools, you have your business name registered, and you have prospective clients. Now what? It's time to get bonded and insured.

Like most small businesses, contractors usually need General Liability Insurance, Property Insurance, and Workers' Compensation Insurance. But unlike other businesses, contractors need to purchase License and Permit Bonds.

You may have heard the term "surety bond" in other contracting work. License and Permit Bonds are types of surety bonds that basically assure the government that you are working within regulation and following building codes for the type of work you're performing.

How Does a Surety Bond Work?

How Does a Surety Bond Work?

The surety bond has existed for thousands of years as a way to guarantee compensation to one party if a second party doesn't fulfill the terms of a contract. It's different than most insurance policies because it's not a contract between two parties (the insurer and the insured). Rather, three parties are involved:

  • The obligee (the client). This is the recipient of an obligation.
  • The principal (the contractor). This is the person who will perform the obligation.
  • The surety (the insurance company). This party assures the obligee that the principal can perform the task.

In other words, the insurance company can cover your client's losses if your work isn't up to code or you don't have a license. The surety's duty is to the obligee, which means you must reimburse the insurance company any amount they pay toward a bond claim.

For example, say you installed the plumbing in a new house. Later, you find out your client has to pay for damage because the plumbing wasn't up to code. The homeowner can make a claim on your bond, and your insurance company can compensate them for the cost of repairs. In turn, you repay your insurance company for that amount.

Having a surety bond can help you win the trust of clients. It assures them they won't lose money by hiring you. In a way, your insurance company vouches for your professionalism by bonding you. Insurers only bond responsible contractors that are qualified to do the work correctly. They also prefer to bond contractors who don't have a claims history.

License and Permit Bonds: The Surety Bonds for Contractors

License and Permit Bonds: The Surety Bonds for Contractors

As a contractor, you need a License or Permit Bond before you can get a license or permit for certain business activities in some jurisdictions. The bond guarantees to the federal, state, or municipal government that you can comply with any underlying laws and regulations related to your industry.

For example, let's take a look at how an electrician gets an Electrician's License:

  • The electrician needs a license to legally operate in the state.
  • The insurance company evaluates the electrician's industry experience, bond history, and creditworthiness.
  • If the electrician is approved, the surety writes the bond.
  • With the bond as assurance, the local government agrees to issue the license once other qualifications are accounted for.
  • The electrician can legally do business (and probably make a lot of money).

For many other types of contract work, you must have a License and Permit Bond to actually receive the license or permit, which you need before you can work. Make sure you know which licenses and permits you'll need in order to do business, and then seek out a bond provider.

Contractors: Why It Pays to Get Bonded

Contractors: Why It Pays to Get Bonded

Even if you don't need a license to work for a client, contracts often require you to have a bond as a show of good faith. To review, these are the reasons contractors should be bonded:

  • It builds trust with clients, which gives you an edge on the competition.
  • It demonstrates that you have a history of responsible work.
  • It allows you to get the licenses and permits you need to operate legally.

Being bonded and insured is one of the best ways to show potential clients that you are a reputable contractor who does good work. In short, it's an easy way to build credibility and grow your business.

To get free License and Permit Bond quotes, apply online today.

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