What is a contractor bond? A Contractor Bond is an agreement to assure performance by the Contractor on the agreed contract. There are three involved in this kind of bond; the Contractor, the customer, and the insurer (sometimes called the surety company).
The contractor will generally be required to submit a written contract with terms of payment and delivery. The customer will pay a certain sum of money in return for a right to use and enjoyment of the property covered by the Contractor’s bond. An insurance company may be involved as an additional surety for the bond.
The purpose of the bond is to protect the public from harm and, as is usually the case, to protect the Contractor and his/her license from liability. A bond in this state is usually referred to either as a surety bond or as an undertaking bond.
A surety bond means that if you were to damage the property of the Contractor, you would pay the Contractor’s costs for repairing the damage caused. In the undertaking bond, you are merely pledging the interest of the Contractor to the insurer in case you were to go bankrupt.
In a surety bond, you have the responsibility of paying to the insurer any claims made against you and agree to all inspections by the insurer. What are some of the typical requirements for obtaining bonding?
To qualify as a surety, the Contractor must have complied with the bonding requirements imposed by the respective State. To qualify as an undertaking, you must have co-operated with the insurance company to resolve disputes. How can one obtain guaranteed performance?
In order to be issued a surety or undertaking bond, a contractor or his legal representative or a designee will need to: meet the state and local bonding requirements; obtain a license; submit to, and pass a validation’s hearing, and produce a signed financial statement with tax identification numbers and financial statements with credit references.
To obtain a license, contractors will need to: comply with all State and local laws; and obtain an application on the appropriate form from the Department of Insurance.
To be sure that the license is renewed, it will be necessary to: comply with all State and local laws; and, produce a renewal application on the appropriate form from the Department of Insurance.
What are the various types of contractor license bonds? The various types of bonds include limited liability company bond amount (LLC), general obligation bond amount (GO), and financial investment bond amount (FI). Washington State contractor bonds are unique in their own way as mentioned in this article.
The limited liability company bond amount (LLC) requires the Contractor to have at least one member who is an individual and at least one member who is a corporation.
In the general obligation bond amount (GO), contractors, or their legal representatives must: have a minimum of one corporate member and at least one individual member who is a non-exempt partner.
Non-exempt partners are individuals who do not belong to any one of the parties. Financial investment bonds (FI) require that contractors and their legal representatives have at least one corporate member who is an individual and at least one individual member who is a non-exempt partner.
Contractors cannot hold more than one financial investment bond. Lastly, the bond required by the Insurance Company of Texas (ICT) does not require proof that the Contractor has complied with the Franchise Disclosure Documents Act (FDD). All of the above bonds are regulated by the State Contractors’ Bureau.
Before contracting with a contractor, be sure to ask if the contractor is a licensed bonded professional. A licensed bonded professional is required to meet strict business rules. Be sure to verify that your contractor is indeed licensed before signing any agreement or contract.
Ask your real estate broker as well as the Contractor about the licensing requirements. If the Contractor is not a licensed bonded professional, they will not be able to obtain FDD certification for their contractors. Bonding requirements vary from state to state.