Most states oblige individual trade workers and companies to have a contractor license bond for any project they work on. It’s one of the primary requirements for obtaining a license. Plus, this policy acts as a guarantee for their businesses. It gives extra security to clients that contractors will work diligently.
As explained on http://www.contractorbond.org, most reputable companies and trade workers ask for issuing this bond. That way, they want to warn of possible problems that may sabotage their work, project completion, and reputation. It’s an arrangement between them, the state, and the company backing the bond up.
Why You Need Contractor License Bond
Contractors in the United States work in different trades and on different projects. These are electricians, plumbers, constructors, HVAC technicians, etc. They must be licensed and comply with all regulations imposed by local authorities. Only that way can clients trust them.
Regardless of the project size and complexity, many things can go wrong and cause failure, disruptions, or financial loss. Even the most professional undertaker can make a single mistake that can cost millions. So, it is vital to have adequate insurance for the job.
The contractor license bond includes three parties. The first one is the obligee or a project owner (individual, company, or the state, in case of federal projects). The owner, whether private or public, can require undertakers to have this document. It will ensure that they will be paid in case of a financial or performance issue on the project.
The other two parties in this agreement are the principal and the bonding company. The principals are trade companies or individual workers hired by the obligee. Therefore, they must purchase this policy from the surety company, which will pay for any claims against the principal.
Not the Same Thing as Insurance
You, as the contractor, get the bond to protect yourself and your client from any problem that can occur during a project. If something goes wrong, your clients end up with a financial loss. So, suppose they suffered loss because of your negligence, failure to meet state or local regulations, or tax issues. In that case, they can file a claim with the insurer (bonding company).
It is important to note that a contractor’s bond is not exactly the same as insurance. It works the same way, but with a big difference – you will pay for the coverage sooner or later. In the best case, you will pay the client for the damage, and there will be no need to use a surety bond.
But if the contractor can’t pay for the damage, the surety pays that and thus diminish the obligee’s harm. So the clients are pleased, and you got a problem off your back. But it’s not like you’re free of charge. After the surety paid for the claim, you must pay them back within the agreed time.