Things to Know about Contractor License Bond

Hiring a contractor can sometimes be a nightmare, no matter why you need them. There are many requirements they must meet to work in the construction industry, and one of them is proper licensing and adherence to industry codes and regulations.

Contractors need a license for their business to be legal in the state they operate in. Also, it enables them to work with different clients, and it’s an absolute must for all companies working on government-related projects. Here’s the procedure for getting a license.

The license already obliges contractors to adhere to rules and do their job properly. However, clients, the general public, and primarily the government need additional assurance that the construction company will adhere to the license requirements. As a guarantee, contractors should have a contractor license bond (CLB).

Who Needs CLB

This document is binding for contractors working in the construction industry, regardless of what they do. However, this requirement depends a lot on the state regulations because the same rules don’t apply in different states. Sometimes, CLBs can be enforced at the city or county level.

In most states, all types of contractors must hold this type of bond. So, everyone from GCs to plumbers, roofers, and even pool installers must provide this document. It’s an assurance to clients, the general public, and the government that they’ll perform their work following license requirements, professionally, and without delay. Otherwise, they may face certain financial and legal consequences.

What Does the CLB Cover?

Before we move on to bond coverage, it’s important to clarify the terms used in this contract. It legally binds a contractor (i.e., principal), the entity that requires the CLB holding (state, niche association, etc.), and surety (a company that issues a bond). This provider should be a reputable company with enviable industry experience. For further insights into the distinctions between being insured and bonded.

These three parties are an item in the contract that is constant. What can differ in CLBs, depending on the state where they are issued, is the degree of coverage. Different bonds can cover various events, from non-compliance with contracts and delays in the execution of works to financial fraud. 

In each case, the damaged side can file a claim and thus receive compensation due to the contractor’s non-compliance. However, it doesn’t necessarily mean that each of the mentioned events will lead to a lawsuit. 

Parties involved may try to come to an agreement before initiating claims. Also, a state board may initiate disciplinary steps first. They’ll take stricter actions, such as license revocation, only in the case of a severe violation.

What Happens in the Case of Filling a Claim

Whatever contract breach was made, an obligee has the right to file a claim against the surety bond. This means that, based on this document, the obligee can ask for compensation and an investigation. A surety company should conduct it to determine the claim’s validity.

The surety company informs the contractor that the procedure has been initiated and that they must respond to the claim. If not, they can face legal consequences. But if contractors act promptly and ask for an out-of-court settlement with the damaged obligee, they can solve the problem with less hassle and fewer expenses. 

If the out-of-court agreement fails, contractors have to deal with a lawsuit. When the obligee proceeds with the claim, which happens to be justified, they’ll get compensation through the surety company that issued a bond. Surety pays only up to the agreed bond’s limit, and the principal is responsible for covering all other costs up to the full claim amount.

How Contractors Get Bonded

If you are a licensed contractor, obtaining a contractor bond is a simple task. It’s about finding a surety company, alone or with the help of a broker. In the latter case, they’ll look for the most favorable deals with the lowest rates for you. You have to choose a bond whose licensing requirements are under state, county, or city regulations.

Surety companies evaluate you as a principal by checking your credit score, recent credit history, business reputation, finances, etc. Based on that, they make an offer with a maximum bond limit. It’s the amount the surety company will pay on your behalf, so they must be sure you have enough funds to settle a claim fully.

You pay for a surety bond, about 5 to 10% of its coverage annually. That amount is negotiable, depending on your credit score and business reputation. Then, you file CLB with the obligee, following their requirements. Every year, you renew the bond and thus ensure coverage all the time.

Clients hiring construction companies need assurance that these contractors will do their job the best they can, following the license requirements. CLBs are legally bound documents that provide guarantee and benefit to all parties included.

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