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California Contractor Bonds – What They Are – Why You Need Them & How to Get the Best Pricing!

The California Contractors State License Board (CSLB) requires all licensed contractors or license applicants to obtain a license bond, or bond equivalent, as a condition for being licensed. As outlined in section 7071.6 of the California Business & Professions Code, the bond is for the benefit of a contractor’s customers if they are financially harmed as a result of a contractor’s actions.

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Why Is a License Bond Required?

Contractor license bonds are legal contracts designed to protect the general public by guaranteeing contractors will adhere to all state laws and regulations as outlined in the California Business & Professions code or risk a bond payout, which in addition to resulting in a financial loss, can result in disciplinary action by the CSLB. Unlicensed contractors are not bonded and as such, do not provide the same level of financial protection to consumers. Each year the California Contractors License Board receives thousands of complaints regarding unlicensed contractors and they regularly conduct sting operations designed to catch and prosecute these offenders.

How Do Contractors License Bonds Work in California?

Contractor license bonds provide a financial guarantee to the state of California to ensure contractors operate in a legal and ethical manner. If a contractor’s customer is financially harmed as a result of a state law violation, then a bond payout may occur. An example of a bond claim could occur if, for example, a contractor obtained a deposit from a customer to build a new kitchen and failed to complete the work as outlined in the contract. In this instance, a customer could file a claim against the contractor’s bond.

Before a surety makes a payout on a bond, it will investigate the claim and its validity, sometimes in conjunction with a CSLB-initiated investigation. If a payout does occur, the contractor is responsible for repaying the surety the amount of the bond claim plus legal expenses, unlike with typical insurance. To avoid bond claims, contractors are well-advised to communicate with and resolve disputes with customers before they become bond claims whenever possible.

How Much Does a California Contractors License Bond Cost?

The California Contractor License bond costs between $99 and $600 depending on the personal credit, license history, and classification of the contractor. Discounts are often available if you purchase multiple years at a time.  This helps you lock in the lowest rate and allows you to have to not worry about renewing every year and going through the process of shopping every year for your California Contractors License Bond.

Is a credit check required for California contractor license bonds?

Surety carriers will run a credit report as part of underwriting because the contractor ultimately must reimburse the surety bond company in the case any claims are made on a bond. The credit check is a soft check, which will not impact your credit score. The Contractors Resource Center works with several surety bond companies with varying risk appetites, allowing contractors with poor credit to purchase the bond for the lowest rates available in the marketplace.

How Does a Contractor’s License Bond Differ From Insurance?

The primary difference between insurance and a contractor license bond is that the bond is used to protect consumers from a contractor’s unlawful actions, while insurance is used to protect a contractor from unexpected business-related liability exposures. Another key difference is that a contractor license bond is required as a condition for being licensed, while liability insurance is generally not unless the contractor is organized as an LLC. Insurance also differs from a contractor license bond in that it does not have to be paid back in the event of damage or injury. Ideally, a contractor should be both bonded and insured.

How Long Is A California Contractor’s License Bond Valid?

A contractor’s license bond can be valid for as little as one year or as many as five years depending on the surety and how many years were purchased in advance by the principal. California contractors with good credit usually have an opportunity to purchase a license bond with a term of several years, while those with poor or marginal credit generally are not offered bond terms greater than one year.

What Other Types of Bonds Are Required for Contractors?

Bond of Qualifying Individual

A bond of qualifying individual is required if a license is qualified by a responsible managing employee (RME) or a responsible managing officer (RMO) that does not own at least 10% of the voting stock of a corporation. An RME must not be the qualifier for another license and must be a bona fide employee of the business and employed for at least 32 hours per week, or 80% of the business’s operating hours, whichever is less. Contractors that have a license that is not qualified by an RMO or RME do not require a BQI.

Disciplinary Bond

Contractors who have violated state law, resulting in the revocation of their license, may be required to carry a disciplinary bond if they want their license to be reissued or reinstated by the CSLB. This bond is in addition to a contractor license bond. The amount varies depending on the severity of the contractor’s infraction.

LLC Employee/Worker Bond

California contractors organized as an LLC in California are required to maintain a $100,000 LLC/Employee work bond as a condition for being licensed in addition to a license bond. The bond protects workers of the organization against unpaid wages and or benefits they are owed.

Have a Bond or Insurance Question?

Call Kevin @ 530.320.3617 or email at: [email protected]

Need a Bond? Get Your Bond Today. The Process is Fast and Simple and We Guaranteed The Lowest Costs!

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