Have you ever witnessed a van with the slogan “licensed and bonded”? Have you ever wondered what this signified?
The term “bonded” is less obvious. The truth is that the majority of the general public is unaware of what it means for a company to be “bonded.”
Contractors and construction professionals are among the most common licensed and bonded enterprises.
What does “Licensed and Bonded” Mean?
To get a business license, it is necessary to fulfill all State or local municipal regulations. Typically, this entails registering your firm, filling out documents, submitting proof of insurance and a surety bond, and meeting any other requirements deemed required by the governing body.
Your ability to fulfill all of the government’s standards is seen as a measure of protection for citizens of that State or municipality.
This licensing procedure is intended to weed out “bad apples” that engage in unethical business activities or are otherwise unable to fulfill contractual commitments. This minimum degree of responsibility is meant to increase the collective quality of work in a particular field and to safeguard consumers.
The simplest and most convenient way to “become bonded” is to obtain a surety bond to cover the parties with whom you enter into contractual agreements.
Obtaining a surety bond provides consumers with a measure of protection in the event that you breach a contract and leave them holding the bag. Then, these individuals may bring a claim against your bond and be reimbursed for your negligence.
Who makes payment on a surety bond claim? First, the surety firm is responsible for issuing the bond. However, the surety firm will then seek compensation from you.
Therefore, when a business is “bonded,” it indicates that a surety company has reviewed the company’s work history, credit history, and other pertinent facts and determined that they meet the criteria for financial backing.
Understanding “Licensed and Bonded”
In the United States, businesses frequently use the phrase “licensed and bonded” to demonstrate their validity and reliability.
A license indicates that a person or company has received the required training in his area, whereas a surety bond indicates that he has funds set aside to cover any claims.
A client should also look for written proof of bonds and licenses, as these safeguard against substandard craftsmanship, theft, and unlawful activities.
Obtaining a license verifies that a service provider has been educated on the proper procedures and rules pertaining to his service. This indicates that the licensee is qualified and able to do the required tasks.
In addition, it implies that the employee is knowledgeable with the laws and standards of his field in that particular area of governance and can be held accountable if the requirements are not followed.
If rules are not followed, the service provider’s license to operate in the city, state, or country may be revoked.
In many instances, a corporation may possess only a license, but it is crucial that they also be bonded. This indicates that a bonding company has set aside state-controlled funds in case a client lodges a claim against the business.
A client could bring a claim against a company, for instance, if a household item was damaged or stolen during the plumber’s job. The client would be compensated from the bond if the investigation determined that the plumbing business was culpable.
A corporation can also obtain bonds for personnel who work with extremely valuable property, which typically requires a full background investigation.
The process of obtaining a license and bond differs according on the type of business and the location of the business. Commonly, to obtain a license, professionals must pass competency examinations, demonstrate experience, demonstrate mastery of laws and regulations, have a clean criminal record, and post a surety bond.
These criteria are typical, although they do not apply to every firm in every region. Certain licenses do not require a bond, thus it is crucial for customers to ensure that if a company is not bonded, it is licensed and insured. The client should study the licensing requirements and insurance policy in this circumstance.
The principal, who performs the service, the obligee, or customer, and the surety, who financially guarantees that the principal will complete its contractual commitment, are the parties to a surety bond. The principal pays a premium to the surety, which then pays the obligee if the principal breaches the contract.
This would be the case if a client hired a licensed and bonded lawnmower that only cut half of the lawn. The surety will then reimburse the client for both the initial price and any legal fees incurred as a result of the investigation. Bond companies provide bonds to corporations at competitive pricing depending on the risk associated with the service supplied.
Hiring a Licensed and Bonded Contractor
Remember that there are 25,000 distinct types of surety bonds in the United States, of which I have only discussed one.
The answer to the question “how to get bonded” varies from bond to bond, but this explanation corresponds to what you are most likely to encounter with all the “licensed and bonded” jargon floating around.
If you hired a contractor who is “licensed and bonded,” you can submit a claim against the contractor’s bond in precisely this situation. The assurance firm pays for someone else to complete the work, and then pursues the contractor for the total sum.
Herein lies the operation of surety bonds. Surety bonds are a “good faith” mechanism that enables individuals to enter into contracts with a degree of security or safety net.
In the meantime, your basement is a disaster, despite the fact that you’ve already paid for more than half of the work in advance. You have lost money and the task has not yet been completed.
There are several reasons why only licensed and bonded contractors should be hired. Here is an exception:
Consider that you employ a “licensed and bonded” contractor to finish your basement. Imagine that this contractor also has a drinking issue, a criminal problem, an ex-wife problem, and a bankruptcy problem. His business fails and he flees the city.
Should I Hire Someone That is Not Licensed and Bonded?
Not one bit. If you choose to hire an unlicensed and uninsured contractor, you should be aware that you assume all financial risk associated with the contract. If the contractor abandons the job, becomes ill, declares bankruptcy, or any of a variety of other bad events occur, you will be financially responsible.
You could hire a lawyer and pursue them, but it’s unlikely that you will receive anything other than a bill and a headache. A surety bond is a far more streamlined and convenient choice for consumers.
Therefore, if you have the ability to engage a certified and bonded contractor, you should absolutely do so.
Why You Should Ask Whether a Contractor is Licensed
Without a license, a contractor is in violation of the law. There is also a strong possibility that they are cutting corners in other areas, such as not acquiring the necessary licences and inspections.
This can result in your project not meeting code standards and, in addition to posing safety issues, you may be obliged to repair or remove non-compliant features before selling your home. When products are installed by an unlicensed contractor, warranties can also be canceled.
Using an unlicensed contractor may put you in jeopardy if the contractor is injured on the job site. You would be obligated to provide insurance coverage for their injury and might be sued.
How Much Will Licensed and Bonded Cost?
The majority of states impose standard costs for each type of license. The licenses and associated costs will vary based on the state or states in which you conduct business. Certain licenses will cost more than others.
When considering the cost of obtaining a license, include the renewal fees, as you will need to periodically renew your bond (depending on the state you are in and the line of work you do).
These fees will accumulate over time, so be sure to factor them into your licensing costs. When it comes to obtaining a bond, different levels of surety bonds will incur varying costs.
The surety bond is not insurance for your business but rather a credit line granted by the bonding company. To obtain a more accurate cost estimate, you will need to obtain a quote from a bonding agency, such as NFP, to determine what your payments will be for the level of coverage your business desires or will require for safe operation.
Why is Licensed and Bonded Important to be Bonded?
Being licensed in your sector demonstrates that your business is credible and knowledgeable, and it maintains your good standing with the state. Numerous states mandate that specific occupations (electricians, roofers, etc.) be licensed in order to practice inside the state’s borders.
This assures that the organization complies with building codes and provides quality work that does not endanger the general public. Government agencies may launch legal proceedings against a corporation that continues to operate without a license.
Bonds are essential because they provide protection for both the business and the general public. A popular sort of bond is one purchased by a janitor, for instance (janitorial bond). These bonds protect both the janitor and their employers in the event that the firm or individual who hired them makes a claim of theft or stolen property.
Bonds can also protect corporations if a task they perform malfunctions, damages their property, or poses other risks to the general public. Being bonded helps protect your firm and its assets through the line of credit if problems emerge. Otherwise, your organization is responsible for covering all expenses.
A sizable claim might place a small or medium-sized business in dire financial straits and even force it to cease operations. By offering a credit line that can help cover you in the event of a problem, being bonded helps shield your business from these avoidable risks.
What are the ramifications of not being licensed and bonded?
Obtaining a license demonstrates that you stand behind your work and that you are protected in the event of an accident. Many clients will want to know if you are licensed, bonded, and insured, and they will be hesitant to hire you if you are not adequately covered in the event of an accident that damages their property.
If you are unlicensed, unbonded, or uninsured and an accident occurs while you are working, you could be held accountable for the resulting damages. This could lead to litigation from individuals whose property was harmed or destroyed.
If you are determined to be responsible for the damage, your firm will be required to reimburse the cost of repairs. This may result in the sale of assets and property to meet the cost of damages. Having a license and a surety bond protects your business with a credit line in the event of a mishap.
If there is any damage to someone’s property or public property, the line of credit will enable your business avoid direct liability for the losses. The license demonstrates that you are qualified to undertake the work you are conducting, whereas the bond provides financial protection for the organization.
Operating without a license can cause problems with the local or state government or authorities. If you work without a bond (and maybe insurance), you may be held financially responsible for any mishaps.
Being bonded and licensed means that your firm is covered, and in the event of an emergency, it can prevent you from catastrophic losses that might lead to serious financial problems or even business failure. It is vitally necessary to safeguard your livelihood.
ProsThe contractor must satisfy the surety’s stringent prequalification standards in order to obtain a bond. If they are able to secure a surety bond, it is a signal that the surety is confident in the contractor’s ability to successfully complete the contract. If they are unable to obtain a surety bond, you may want to consider hiring a different contractor.
Bonds also protect you from losses if the contractor is unable to carry out the contract due to financial difficulties or a lack of qualified personnel. As a result of the contractor’s obligation to reimburse the surety for any losses, the contractor is less likely to fail on the contract, despite the substantial risk to their business.
The contractor is responsible for obtaining the bond, although the homeowner may be charged for its cost. If a default occurs, collecting may prove challenging. The surety firm may dispute the homeowner’s claim of a default, compelling the homeowner to go to court.
Insured Contractors Pros & Cons
ProsProtect yourself by requiring a contractor to hold general liability and workers’ compensation insurance. In the event that a roofer is injured while fixing your roof and the contractor is uninsured, you may be responsible for the worker’s medical expenses, and your homeowner’s insurance may not cover it.
General liability and workers’ compensation insurance cover the majority of potential project catastrophes.
It may take more time to discover the ideal professional for your job if you require contractors to carry insurance.
However, general liability insurance and workers’ compensation are quite standard in the construction industry and the majority of crafts. You may have to pay extra to hire an insured contractor, but this is one cost-cutting measure you should never take.
Bonded Contractors vs. Insured Contractors
Depending on the nature of the homeowner’s home improvement project and the circumstances, the distinctions between bonded and insured contractors may be significant. Here are several approaches to comprehend their differences.
Due to the fact that a contractor must repay a surety bond if it is ever utilized, the expense of obtaining one is minimal. However, contractors who are covered by an insurance firm are exempt from paying back the claim. Most cost-savvy: Depending on the specifics of your
Generally, surety bonds simply cover the contract itself. Insurance goes above and above to cover claims of harm or damage. As a result, insured contractors may be more appealing to homeowners than contractors who are simply bonded. Maximum coverage: Insurance
For contractors to obtain a license, a surety bond is frequently required. Unless stipulated by the terms of the contract, insurance is often optional. Therefore, if it is essential that the contractor you choose be insured and bonded, you should state so in the contract. Most competent: Depending on the specifics of your
Why it Helps to Hire a Contractor Who is Both Bonded and Insured
Selecting a local contractor who is both bonded and insured affords you the highest level of protection. Because the contractor is bonded and insured, you will not be accountable if they default on the contract, and you will not be responsible for any workplace injuries that occur on your premises.
In most cases, the most reputable and skilled contractors are also insured and bonded; consequently, they will be the most likely to execute the project satisfactorily and without incident.
Obtaining a license signifies that a person or business has met the basic standards in their profession to acquire a license from the state in which they conduct business. Bonding indicates that the business may have a surety bond that protects the individual or the business if a claim is made against them.
If the claim turns out to be valid and the corporation is unable to pay the amount owed, the bond will cover the claim.
The majority of bonds sought by businesses are mandated by the government for their line of operation. The assumption is that having a bond and insurance will reduce the risk to the company and the public if something goes wrong during commercial operations.
Once you have determined the sort of bond you desire, the majority of insurers will require you to supply basic information to calculate your coverage (state you are from and doing business in, the business you are operating in, and the amount of coverage you will need).
Then they will be able to present you with estimates of how much you will have to spend monthly/quarterly/annually to obtain the coverage you require.
Latest posts by Pat Moriarty (see all)