California is one of many states in the U.S. that requires a contractor to be licensed by the state in order to operate within the state. To further protect it’s consumers, the state also requires the contractor to have a $15,000 bond in place or the equivalent cash deposit before a license can be issued. The cost of the bond is based on the type of bond required (not all contractor bonds are the same) and the credit score of the applicant. Most bonds are about $120 with an above average credit score and go up as the credit score goes down.
Bonds are Not Insurance
Many contractors are under the false assumption that a bond is similar to insurance since they are typically purchased from an insurance company. In reality, bonds are more like a line of credit that must be repaid if the bond is redeemed by a consumer. The purpose of a bond is to indemnify the consumer which is also the purpose of some types of insurance. However, a bond is not insurance.
Bonds are a Promise
A surety bond is a contract in which a surety company (the surety) makes a financial guarantee to the obligee (the consumer) that the contractor (the principal) will perform according to the contract. If the contractor does not fulfill their obligation to the consumer, the consumer can redeem all or part of the bond as a financial remedy. Unlike insurance, the contractor must pay back the amount of the forfeiture to the insurance company which is why the cost of the bond is based on the contractor’s credit worthiness.
The Contractor’s Obligation
Typically, a contractor is obligated to avoid committing any violations of the Contractor’s License Law that are considered grounds for disciplinary action against the license. The law describes specific violations that the bond will cover. If the contractor commits a violation of the contract, the consumer, supplier, or employee can file a claim against the bond for remedy. When the insurance company pays the claim against the bond, the insurance carrier will require repayment from the contractor to offset the amount of the claim.
The Surety Company’s Obligation
Anytime a surety company pays a claim on the contractor’s bond; the surety company must, by law, report the loss payment to the CSLB and must attempt to collect the amount of the loss from the contractor. The surety company may then cancel the bond, and the CSLB may suspend the contractor’s license until such time the contractor has reimbursed the surety for the loss.
A payment from the bond will most likely affect the contractor’s license, livelihood, and the ability to obtain bonds in the future.
For more information and a free commercial insurance quote, contact an insurance professional at Fairbanks Insurance Brokers at (949) 595-0284.