Should contractors be bonded and insured? Well, only if you want to win the most customers possible. Savvy homeowners will know the difference between liability insurance and a bond. And if a contractor isn’t bonded, they may very well stay away from them.
So the short answer to these questions is yes. All contractors, whether you fit pipes, install electrical boxes, hang drywall, or shingle roofs, should be bonded and insured. But for those of you with inquiring minds, Contractors’ Society of America will be explaining why you should be licensed and bonded as a contractor. But let’s start with the basics.
What is the Difference Between Being Insured and Bonded?
There is a common misconception that insurance and bonds are essentially the same things. That isn’t the case. In straightforward terms, a surety bond protects contractors’ customers while liability insurance protects the contractor.
A surety bond is a certain amount of money that a contracting company puts up to a surety bond company. If the contractor fails to follow local building codes and regulations, leaves a job incomplete, or detriments the property, the consumer, can go after the company’s surety bond.
The bond protects the customer from an ill-intentioned company and keeps contractors honest. On the other hand, insurance means that you won’t be on the hook if a contractor is injured while working on your property.
There are different insurance types that a contractor should carry, like liability and worker’s comp. Still, these policies are more to protect the contractor and his/her company more so than the customer.
On the consumer end of things, there is one significant difference between insurance and bonding. As erstwhile mentioned, a bond will protect the customer if the contractor fails to follow building codes. Adhering to regulations is very important.
Say, for example, you hire an electrician to wire a room you recently added to your house. The project goes off without a hitch; you pay the contractor and say goodbye. But a few months later, your new addition doesn’t pass inspection because of faulty wiring.
In this case, the electrician’s insurance can’t help the consumer at all. But the bond can. The customer could file a claim against the company and go after their bond money to help cover the cost of rewiring.
Do you Need to be Bonded?
The tricky thing about bonding is that some states require it to get your contractor’s license, while others are laxer on the rule. Here is a full list of which states require a bond, but it’s best to contact your local licensee board for specific regulations.
That’s because some states require a bond for some trades but not others. The county you are operating in may be a determining factor as well. For instance, if you are a contractor in Montana, you may be required to be bonded in one county but not the neighboring one.
Do you Need to be Insured?
Again, the short answer is; absolutely. Different states have different license laws. Some require insurance for you even to get your contractors license. But in general, you will need at least some basic insurance to obtain your contractor’s license.
But apart from the requirements, not having a full complement of insurance as a contractor can cost you customers and income. That’s because some home owner’s insurance policies require that the homeowner works only with insured, licensed contractors.
So, for example, a homeowner could have their insurance voided if they knowingly work with a contractor who is not insured. For this reason, many savvy property owners will stay away from contractors who don’t carry a full complement of insurance policies.
Final Thoughts From CSOA
In the end, the bonding and licensing process benefits both contractors and their customers. It may seem like a hassle for a contractor to pay into a surety bond every year, but it keeps your work honest, which in the end is suitable for your business.
On the flip side, it can be a chore for the consumer to obtain multiple estimates from different contractors (as is the smart practice) and to make sure they are all fully licensed and bonded, but in the end, it’s worth the effort.
But whether you are a consumer or contractor, we can make the process more comfortable with the wealth of resources we offer here at Contractors Society of America. Reach out to us today.