Contractor License Bonds
What is a Contractor License Bond?
As a specific type of surety bond, each contractor license bond that’s issued functions as a legally enforceable contract that binds together three separate parties:
- The construction professional that buys the contractor license bond acts as the principal.
- The state agency that requires the contractor to be bonded acts as the obligee.
- The company that issues the bond and guarantees the contractor’s obligation acts as the surety.
If a contractor fails to fulfill the bond’s terms, then the obligee can make a claim on the contractor bond as a way to gain compensation for any damages. However, the surety will not simply absorb the loss as do underwriters of traditional insurance policies; instead, the surety will expect the contractor to repay it for any claims paid out. Known as an “indemnification clause,” this language is typically included in the bond’s legal language to ensure the surety doesn’t lose money.
Construction professionals sometimes misunderstand the purpose of contractor license bonds by assuming the coverage protects themselves. However, surety bond insurance is not the same as traditional insurance policies. This type of surety bond actually protects the general public by guaranteeing that construction professionals will adhere to whatever stipulations are found within the bond’s legal language. By purchasing contractor license bonds, construction professionals agree to work according to certain regulations, thus protecting government agencies and consumers from potential financial loss.
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