Understanding Contractor Surety Bonds

State laws commonly require contractors to have a surety bond posted as a condition of licensing. A surety bond is a contract in which the surety company that issued the bond promises that the bonded contractor will comply with the laws of the state that issued the contractor’s license. The amount of the bond is determined by the state in which the contractor is licensed. If the bonded contractor does not comply with the applicable state laws, a party that has suffered damages as a result of the violations can file a claim against the bond. If the amount of the bond is insufficient to pay the entire claim the amount that is paid will be credited against the claim, and in the event multiple parties have filed claims against a contractor’s only bond, the bond amount will be divided proportionately among all the claimants with approved claims, subject to any priorities that may be established by a state’s laws.

Claims that have been filed against a contractor’s bond will be investigated by the surety company and, if approved, paid up to the amount of the bond. If a surety pays out on a claim, it will report the loss payment to the state’s licensing board and the contractor’s license may be suspended until the amount that was paid by the surety has been reimbursed by the contractor. State statutes will specify who is eligible to make claims against a contractor’s bond, but they typically include:

• Homeowners who contracted with the contractor;
• A property owner that contracted for the construction of a single family residence;
• Any person that has been damaged by a contractor’s fraud, or intentional violations of state contracting laws;
• Employees of the contractor who were not paid;
• Subcontractors and suppliers who have not been paid.

Parties that wish to make claims against a contractor’s surety bond can obtain information on the company that issued the bond to the contractor from the contractors’ licensing board in the state where the contractor’s licensed was issued. Once the bonding company has been determined, the party should provide the surety company with a written notification of their claim with a description of the facts that gave rise to the claim. Copies of the contract with the contractor and other documents that are pertinent to the claim should be provided with the notification of the claim. Claims should be submitted within any applicable limitations period that is specified in the state statutes.

A claimant against a contractor’s bond that is not satisfied with the surety company’s response to their claim can file an appropriate court action against both the contractor and the surety company to recover the damages that have been caused by the contractor. If the right to recover against the bond is established, the liability of the surety will be limited to the amount of the bond and the jurisdiction of the court (actions filed in small claims court may be limited to a recovery that is less than the amount of the bond, due to the jurisdictional limits of the small claims court).

Information on bonding requirements in the different states can be found via the following link: http://www.jwsuretybonds.com/surety-bonds/licensed-states/