Why Hiring a Licensed, Bonded and Insured Construction Contractor is Important

Why You Should Verify Your Contractor Is Licensed, Bonded, and Insured

Project owners want to ensure their jobs are completed according to their specifications and at an affordable cost. Many homeowners or other types of project owners ask friends and family members for referrals. It’s tempting to hire the contractor offering the lowest price without fully investigating them. Before you choose the contractor with the lowest price, you should question why their bid is so much lower than the others. The contractor with the lowest bid might not be licensed, bonded, and insured.

If you hire an unlicensed contractor that isn’t bonded and doesn’t have insurance, you will place both your project and yourself at risk. Here is what you need to know about the importance of ensuring the contractor you choose is licensed, bonded, and insured before you hire them to complete your project.

Why a License Is Important

Many states and local jurisdictions require construction contractors to obtain licenses before they can lawfully operate their businesses. The licensure requirement is meant to protect the public by ensuring that licensed contractors have the requisite skills, knowledge, and ethics to perform their jobs. If you hire an unlicensed contractor, they can’t legally perform the work under your contract.

Even if you verify a contractor is licensed, you still need to check their references and research the company. Holding a license doesn’t guarantee that the contractor is good at what they do, so make sure to do some additional research.

Why a Bond Is Important

A surety bond is frequently required as a condition of licensing. However, there are some other types of bonds that you might want a construction contractor to get beyond a license bond. Before a license will be issued, the contractor must purchase a bond for contractors.

Three parties are involved in a license bond:

• Principal – The contractor that is required to purchase the bond as a licensing condition
• Obligee – The government agency that mandates the bond as a licensing condition
• Surety – The bond company that guarantees the principal will comply with the law and avoid misconduct by issuing a bond

A surety bond serves as a type of prequalification for a contractor. The contractor must go through an underwriting process before the bond company will agree to underwrite their bond. It works as a guarantee that a company is stable and can be expected to follow through.

If a construction contractor violates the laws and regulations that govern the construction industry, engages in fraud, or commits other types of misconduct, a bond claim can be filed by the injured party against the bond. If the claim is validated, the surety will pay the claim up to the penal sum of the bond. The construction contractor will then be legally obligated to reimburse the surety in full or face litigation.

A surety bond is not liability insurance protecting the contractor. Instead, it protects the public against harm. It essentially provides the contractor with access to a line of credit that will pay if the contractor messes up. License bond claims are filed with your state’s contractor licensing bonds. However, some states require you to file a claim against the contractor directly and obtain a judgment before filing a bond claim with the state.

There are three other bonds that you might want to require for any contractor you hire to perform work.

• Bid bond — Guarantees the contractor with the winning bid will follow through with the contract at the bid price even if they forgot to include something in their bid

• Performance bond — Guarantees the contractor will perform as promised under the contract

• Payment bond — Guarantees the contractor will pay the suppliers and subcontractors so that they won’t have to pursue mechanic’s liens against the title to your property to recoup what they are owed

Ensuring your contractor is bonded and has all of the right types of bonds can help to protect you if the contractor fails to perform the work according to your specifications or fails to pay the subcontractors and suppliers that perform work on your project.

Why Insurance Is Important

Your contractor must also be sufficiently insured to protect both you and them against potential liability. Make sure a general contractor has both general commercial liability insurance and workers’ compensation insurance.

If a company has liability insurance, it protects you against damage to your property caused by something going wrong during the construction. For example, if the workers caused your roof to collapse, you could file a claim with the general contractor’s liability insurance company.

General contractors and subcontractors must also carry workers’ compensation to protect their employees if they are injured while working on the job. If a worker is injured, they can file a claim with their employers’ workers’ compensation insurance company to recover damages. If the contractor doesn’t carry workers’ compensation insurance, the injured worker could file a lawsuit against the contractor, and potentially, against you.

Verifying a Contractor is Licensed, Bonded, and Insured

When interviewing prospective contractors, ask them if they are licensed, bonded, and insured. However, don’t rely on what they say. Ask them to provide you with proof of their license, bond(s), and insurance certificates. A reputable company should not have any trouble giving you copies of these documents. Once you receive them, review them carefully to verify that they are current and in the name of the contractor. You can call the bond company and insurance provider to confirm that their bond and insurance are still valid. You can also look up the status of the contractor’s license with your state’s Department of Labor to confirm the license is current and valid and that the contractor has not been subjected to public disciplinary sanctions.

Ensuring that you only hire contractors that are licensed, bonded, and insured is a smart way to mitigate project risks. If you fail to verify that a contractor is licensed, bonded, and insured, you will assume the risks if something goes wrong and could face substantial losses and potential liability.

See more about insurance on Skill Builder