Required by the Arizona Registrar of Contractors (AZROC) as a part of obtaining a contractor’s license, a contractor license bond is a legally binding contract wherein you agree to follow a set of agreed rules or else clients can make a costly claim against you — which you are then legally obligated to pay. It should be noted that a license bond is not insurance, and, in fact, it does not protect your construction company in the event of a violation of Contractor License Law. To put it simply, the bond is to protect people from contractors, and you should aim to never use your license bond.
How do License Bonds Work?
As the word “bond” implies, a license bond is slightly more complicated than a simple agreement between contractors and potential claimants. Contactors enter an agreement with the state licensing agency and an insurance company, the latter promising the state that you would be able to pay your bond. The entity requiring the blog is known as the obligee and you, the contractor, are the principal on the bond. In the event of a claim, your insurance agency will investigate and pay if the claim is deemed to be valid. You would then reimburse your insurer.
Note that bonds can come in the form of cash, surety, or bank certificate of deposit.
What Might a Bond Claim Look Like?
Not all bonds pay out, and it is not uncommon for people to attempt to file claims that are out of the purview of the bond. For example, a claim that would fall under a general liability policy — such as a customer who trips and breaks their ankle on a job site — would not constitute a violation of a license bond. An important consideration when evaluating a claim then, is whether the violation can be proved willful and deliberate. Incidents that would trigger a bond payout include failure to pay employees or vendors, abandonment of an incomplete job, or a refusal to fix faulty workmanship.
Who Can File a Claim?
Homeowners, property owners, commercial companies, and anyone who hires a contractor to perform work are able to file a claim on the license bond. However, it is not only clients who might file a claim: employees, vendors, suppliers, and subcontractors who have not received due compensation may file a claim as well. Note that from claimant to claimant, what is considered a valid claim varies. Always refer to state law or your insurance agents for specifics.
Why Get a License Bond?
Although license bonds are a means of consumer protection above all else, you are not able to receive a contractor’s license without one in Arizona. And, as you well know, having a license helps to attract more clients and allows you to take on larger, more profitable jobs.
Refer to the Arizona contractor’s license application for more information, such as how anticipated gross annual volume and license classification affect the required bond amount. For help applying and obtaining your bond, reach out to our Go Bond experts.