Contractor Bonding vs. Liability Insurance
After working closely with thousands of contractors throughout the state of California, we’ve compiled some of the most frequently asked questions to answer many of the questions related to contractor license bonds and contractor’s general liability insurance.
Both forms of coverage are important to ensure your business and clients are protected when different situations arise. We will go through what each type of coverage is and how they can help limit your exposure and protect your contracting business.
What is a Contractor Bond?
A contractor license bond is different from contractor’s insurance.
A surety bond is a three party agreement;
- The Principal- The contractor that purchases the bond
- The Obligee– The Contractors State License Board (CSLB) who require this bond in California
- The Surety carrier- the insurance company that financially promises the Obligee that the Principal will follow the terms of the bond.
As a condition for being licensed, the CSLB requires all California licensed contractors to obtain a $15,000 license bond (or equivalent). The California contractor license bond benefits customers when they are financially harmed as a result of a contractor’s actions.
Why Is a Contractor License Bond Required?
Contractor license bonds designed to protect the general public guaranteeing contractors will adhere to the California Business & Professions code’s laws and regulations or risk a bond payout. In addition to the contractor’s financial loss, violations can result in CSLB disciplinary action. Unlicensed and unbonded contractors do not provide the same financial protections to consumers.
The California Contractors License Board receives thousands of complaints yearly regarding unlicensed contractors and regularly conducts sting operations to catch and prosecute offenders.
How Does a Contractors License Bond Work?
Contractor license bonds are a financial guarantee to the state of California, ensuring contractors operate legally and ethically. A bond payout may occur when a contractor’s customer is harmed financially due to a state law violation. For example, a contractor obtains a deposit from a customer to build an additional bedroom but they fail to complete the work as outlined in the contract; a bond claim could occur.
The customer could file a claim against the contractor’s bond in this instance. However, the surety company will investigate the claim, sometimes in conjunction with a CSLB investigation, before making a bond payout.
Unlike typical insurance, if a payout occurs, the contractor is responsible for repaying the surety company the claim amount plus legal expenses. When possible, to prevent this expense, contractors are advised to communicate with customers and resolve disputes before a claim is made.
How Much Does a Contractor Bond Cost?
Because the contractor has a responsiblity to repay the surety company, the price of a contractor bond is generally very low, for some contractors only $65 a year and up to $450. However, there are a several atributes that will affect the price of the Contractor License Bond such as credit score, number of years in business, lapses in coverage and multi-year discounts.
A condition of licensing requires the license bond to be completed on Form 13b-1 and filed with the registrar according to the CSLB. A bond will be continuous unless canceled. The bonds contract language will be similar between most surety companies but not identical. Before completing a purchase, you should review the language on your own and/or with your agent to understand:
- the indemnity agreement
- the terms and conditions
- the cancellation provisions
- the aggregate limits
- the forfeiture clauses (not in California)
The cancellation provision allows a surety carrier to cancel a bond for any reason, usually due to credit changes, not paying premiums or an unresolved claim on the bond. Formal notice of cancellation, with a time period, usually 30 days, must be provided to the contractor/agency before cancelation can take place.
Other forms of insurance will have varying aggregate limits, but a contractor license bond is a state-mandated amount, which is $15,000 in 2021. Included in all bond forms are the penal sum, and many bond forms will also include a clause limiting the amount of financial damage from all parties and claims to a defined amount called the aggregate limit. The aggregate limits of all contractor license bonds are defined in the California Business & Professions Code, sections 7071.5 and 7071.6.
Is a Credit Check Required for a Contractor Bond?
The surety provider will run a soft credit check, which does not impact of affect your credit score because the contractor has the responsibility of reimbursing the bond carrier if any claims are made on the bond. Therefore, credit is the primary factor for determining a license bond rate. If you have bad credit, don’t be deterred, we can still help you find competitive pricing for your California Contractor License Bond. We shop with six different carriers to offer our clients the lowest rates.
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What is Contractor General Liability Insurance?
While the License bond is intended to protect the customer and employees, contractor general liability insurance is there to protect you and your business. Liability insurance is a crucial elements for a contracting company to have when facing legal issues, which would typically be paid out of pocket.
Contractors General Liability Insurance protects your business in the event that a claim of bodily or personal injury, property damage, or advertising injury results from a business’s products, services, or operations. It can also be known as business liability insurance and is essential for a contractor that is interacting with clients and potential customers.
What Does Contractor General Liability Insurance Cover?
Contractor General Liability Insurance helps cover the associated costs if someone claims that they were injured (something was dropped on them) or suffered property damage (something was dropped on their car) directly related to your contracting business.
This General Liability Insurance coverage includes:
- Fees for an attorney to defend your business, and other legal costs
- Paying any settlements owed from a lawsuit
- Paying a customer or client’s medical expenses
- Paying for repairs that are required as a result of damage caused by your company
General liability insurance will not typically cover employee injuries/compensation, auto accidents, workmanship quality, or punitive damages. Other coverages are available for these instances.
Who Needs General Liability Insurance for Contractors?
While it is wise for all businesses to have general liability insurance, it is critical for a small business that could experience an unmanageable financial burden from even a minor claim. With sufficient general liability insurance, the worry of a claim diminishing a livelihood is alieved.
Contractors are in a business susceptible to injury or property damage, and many clients will require a contractor to supply proof of liability coverage to bid on a job, ensuring that their property and equipment will be covered.
How Are Claims Handled for General Liability Insurance?
General liability insurance comes in two types:
- Occurrence policies- cover claims occurring during the policy period regardless of when the claim is filed. Claims can typically be reported up to ten years after the policy period.
- Claims-made policies- cover claims where the occurrence and claim happen during the in-force policy period and are generally not accepted by third parties as general liability insurance.
How Much Does Contractor General Liability Insurance Cost?
Several factors go into the calculation of the cost for contractor general liability insurance. Given the nature of the work, contractors are more prone to injuries and damage than other businesses and will therefore pay higher rates. Additional factors that are considered:
- Number of years in operation (the longer, the better)
- Location and size (Areas like Los Angeles tend to have higher rates / Gross Sales and number of employees also play an imporatant role in calculating insurance premiums)
- History of claims
- Policy details, coverage limits, deductibles, etc.
Businesses that fall into the most competitive range for all categories can obtain liability coverage from $500 per year and up.
Is Contractor General Liability Insurance Required by law?
In California, Contractor General Liability Insurance is not required by law. Requirements vary for other states. However, Liability insurance is highly recommended, to maintain to protect the financial stability of your contracting business. A single claim can wipe out a company or person and even their family if it is a sole proprietorship.
Fulfilling a state’s bond requirements and protecting a business and reputation you have worked hard to establish with trusted coverage can save you many sleepless nights and prevent a significant financial burden.
Working with an experienced agent to walk you through the ins and outs of any insurance contract is essential.
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