Why Contractors are Required to Carry a Bond in California
Contractor bond is a common term in the law field. In legal terms, it means an agreement that involves three parties namely principal, obligee, and a surety.
Talking of the Principal, he or she is the contractor who seeks the bond for his construction business.
The obligee is the organization that imposes the bond that is required by the contractor while the surety company guarantees the obligations of the principal and the obligee.
In case of any claim, the insurance company, which is the surety, in this case, will pay the claim amount which will be later reimbursed by the contractor, who is the principal.
According to www.contractorbond.org/, it is to state law for every licensed contractor in California to carry a bond.
This contractor bond helps the contractor or the principal to carry out his or her business within the jurisdiction of that business community where he or she legally operates.
Whereas the performance bond is used to ensure that the Californian contractor does not breach the terms of the contract, the contractor bond provides the California contractor lives up with the required Californian state laws.
The primary reason why contractors are required to carry a bond in California is to make sure that the consumers or the contractor’s employees who may be financially affected by the work or the activities of the contractor are adequately compensated.
In the event a contractor does not follow the regulations set forth by the CSLB, they may also be required to purchase a disciplinary bond as well.
The contractor bonds in California, unlike insurance, are fully reimbursed. That means, when an insurance company (Surety) pays the amount of the bond and the related legal costs to the affected party, all those costs will trickle down to the contractor (Principal) who will refund the insurance company the entire paid amount.
Hence this is a significant blow to the contractor’s business.
What does it mean to be a bonded contractor in California?
When you acquire a contractor bond in California, which is a legal requirement, you will be free to conduct your construction business in California.
Secondly, the contractor bond acts as a protection element between the principal and the obligee. Thus, when a claim is made against the contractor bond, the principal will be entirely liable to the amount of the valid claim made.
As a contractor, when a bond claim is filed against you, it will not only cost you financially but also your business’s image or reputation.
Factors that Affect the Cost of Californian Contractor Bond
The value of a contractor bond in California depends majorly on the number of premiums to be paid and rating factors like the license history of the principal.
If the credit of the principal or contractor is right, the contract bond will be relatively cheaper and vice versa.
Also, if the license history of the principal is free from defaults such as previous bond claims, bankruptcy among others, obtaining a contractor bond will be quite easy.
Steps Involved in Obtaining a Contractor Bond in California
After the insurance company (Surety) finds out that you are worth the credibility of receiving a contractor bond, the surety will get your business rolling through the following steps.
• Application of the contractor bond
• Submission of the contractor bond
• Receipt of your signed copy of the Contractor bond
There are requirements that you must meet to get a contractor bond especially here in California.
It is essential to check out with the CSLB’s headquarters or any suitable legal firm before applying for one as a Californian contractor.
