Contractors bonds assure that the contractor will operate in compliance with all of the local laws and statutes within the state that they are operating. Each trade of contractor is required by the state in which they operate to carry a contractor license bond in order to be a licensed contractor, whether it is a plumber, electrician, general contractor, or any other contractor.
Even though a contractors bond is issued by an insurance company, it is not Commercial Liability Insurance.
Each contractors bond functions as a legally enforceable contract that binds together with 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.
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