Understanding Contractor Bonds and Insurance

“Licensed and bonded” names one of three common protections. Bonds, general liability, and workers’ compensation cover different losses, and live in different records.

Three Types of Financial Protection, Why You Need All Three

Many homeowners think a "licensed and bonded" contractor is fully protected. In reality, "bonded" refers to a surety bond, which is just one of three financial protections you need. Here's what each one covers:

Surety Bonds: What They Are and What They Don't Cover

A contractor surety bond is a three-party agreement:

• Principal: The contractor
• Surety: The bonding company (guarantor)
• Obligee: The state (or you, the homeowner, as the intended beneficiary)

If the contractor abandons the job, fails to complete work, or causes damage that they refuse to fix, you can file a claim against the bond. The bonding company pays (up to the bond amount), then seeks repayment from the contractor.

Bond Limits Matter

State-required bonds most commonly fall between $5,000 and $25,000, though a handful of states (Nevada, for example) scale the bond up to $500,000 based on a contractor's monetary work limit. On a $150,000 renovation, a $10,000 bond provides limited protection. Bonds are minimum protection - not comprehensive coverage. For large projects, you may want to negotiate a higher bond amount in the contract.

How to Verify a Bond

The contractor's bond status is listed in your state's license lookup database. Look for the bonding company name and the bond amount. You can also call the bonding company to confirm coverage is current.

General Liability Insurance: Your Property Protection

General liability (GL) insurance covers:

• Accidental damage to your property during work (e.g., a wall collapse)
• Bodily injury to a third party caused by the contractor
• Completed operations liability (damage discovered after job completion)

Without GL coverage, if a contractor damages your property, you're filing against their personal assets - which may be nothing. Always require minimum $500,000-$1,000,000 in general liability.

Certificate of Insurance, and Why to Call

Ask for a Certificate of Insurance (COI) naming you as an additional insured. This means the policy covers claims arising from your project specifically.

Critical step: Call the insurance company directly (number on the COI, not one the contractor provides) to verify: (1) the policy is current, (2) the limits match what's on the COI, and (3) the "additional insured" endorsement has been added for your project. Fake and expired COIs are a known fraud pattern.

Workers' Compensation: Your Liability Protection

This is the insurance most homeowners forget, and the one with the most personal financial risk.

If a contractor's employee is injured while working on your property, and the contractor doesn't have workers' compensation insurance, the injured worker may be able to sue you as the property owner. This exposure exists even when the worker was employed by the contractor, not you.

When Workers' Comp Is Required

• Any contractor with employees (varies by state, usually 1-5 employees threshold)
• Note: A solo contractor (sole proprietor, no employees) may be exempt in many states
• Ask explicitly: "Do you have employees? Do you carry workers' comp?"

How to Verify

Ask for a separate Workers' Compensation COI. Verify it with the insurance carrier listed. Some states have a free online employer database to check coverage status.

Recovery Funds: State-Level Additional Protection

Some states maintain contractor recovery funds - pools of money consumers can claim against when all other remedies (bonds, insurance, court judgments) haven't made them whole. Notable examples:

• California CSLB Recovery Fund: Up to $30,000 per claim for licensed contractor fraud
• Arizona ROC Residential Contractors' Recovery Fund: Up to $30,000 per claim
• Florida CILB: Complaint-based enforcement with restitution orders

Check your state's licensing board to see if a recovery fund is available.

Your Insurance Verification Checklist

• ☐ Received COI for General Liability (minimum $500K)
• ☐ COI names you as additional insured
• ☐ Called insurer to verify GL policy is current
• ☐ Confirmed GL "additional insured" endorsement added
• ☐ Received separate Workers' Comp COI (if contractor has employees)
• ☐ Verified Workers' Comp policy is current
• ☐ Verified surety bond status in state licensing database
• ☐ Confirmed bond amount is adequate for your project size