OK this sounds like a novice question, but what’s the difference between carrying liability insurance and being bonded? I always thought being bonded meant you were insured to finish the job if money ran out. Y’all please clarify.
BTW I hold a contractor’s license (basically a county business license that anyone with $50 can get) and I carry general liability insurance on myself, but some clients have been giving me the “eye” when they ask if I’m bonded and I tell them “no, but I have full liability insurance.”
Jason Pharez Construction
Framing & Exterior Remodeling
Replies
As I understand it, "bonded" means that the equivalent of a cash bond has been deposited with some (usually government) agency. In practice the "deposit" is sometimes an IOU from a bonding company, but at least a certain % of cash is required, and the bonding company is judged to be good for the rest.
Bonding is generally done to assure that some action is completed. Eg, that you will show up in court (bail bond), or that you will complete a job.
"Insured" means that an insurance company has agreed to pay in the event of a protected loss. In most cases, the loss must be a loss to you, vs some other party, so you wouldn't, eg, buy insurance to pay in case you didn't complete a job, but your customer might, if the failure to complete might represent a loss to them. You might, however, be insured for your liability, should you cause property damage or personal injury to a customer. (And, of course, you certainly want to be insured against your own injury,, or the injury of an employee.)
In some areas, in order to get a contractor's license, one is required to post a bond of some amount. Should you fail to complete a job and abscond with the payments, your customer may be able to make a claim against the bond to get the job completed. Of course, in practice, when this happens, there are always ten times more claims than there is bond money, so what the bond really is is a barrier to entry to keep totally fly-by-night operators from getting a license.
A performance bond provides a promise from the bond issuer (an insurance company) to the client (the property owner or in many cases, the general contractor), that the contractor for whom the bond is being issued will complete the work per the terms of the contract.
Thus, if you do a job only part way through, and walk off mad and won't return, your client will contact the bonding company, who will make arrangements for another contractor to complete your work. Let's say your contract was for $500,000, and you walked off after being paid $250,000. Then the bonding company's other contractor who finishes your work charges $325,000 to complete. Your bonding company will sue you for the $75,000 difference, and they will likely recover.
General liability insurance protects the named insured from claims for injury by parties involved in the job, whether employed by the insured or not.
Contractual general liability protects the client from shortfalls the named insured might leave not done correctly.
You can likely get a better education on all the fine points of each by googling for them and reading.
In commercial work, it is business as usual for an owner to require the GC to provide full insurance, per the general conditions of the contract, plus provide a performance bond. Typically, a GC asks subs to also fully insure and bond, although unless the bonding requirement was made clear at bid time, the GC will pay the cost of the premium.
I would guess that performance bonds might be a feature of housebuilding work for folks like Bill Gates, but at levels where most of us work, it is unheard of.
Gene Davis, Davis Housewrights, Inc., Lake Placid, NY
>>>>"General liability insurance protects the named insured from claims for injury by parties involved in the job, whether employed by the insured or not."Gene, I thought Gl is protection against property damage or injury to those not in the employ of the insured. If the mailman and HO get hit by a falling bundle of shingles which then knocks the gas meter loose causing a fire, all events would be covered by the GL underwriter.If my employee practices his balance beam act over the two story foyer and becomes a vegetable, WC kicks in to protect both the insured (me) and all others who might be named in a suit (GC, HO, etc.)?Is this accurate?
Jon Blakemore RappahannockINC.com
He said injury (caused) BY parties envolved in the job.Not injury TO them.And it does not need to be personal injury, but also injury to property.
Edited 6/5/2005 4:26 pm ET by Bill Hartmann
I'll throw my 2 cents in, but that's all it's worth.
Here in WA we are required to post $12,000 license bonds. It can be done in cash (held by the state) or by a bonding company. A license bond is basically a guarantee against any sort of claim by an injured party against the contractor. If the contractor defaults on payments to subs, does not perform work owed to the owner, damages something... a claim can be made against the bond. $12K won't go that far, but it's a start. If the bond company pays a claim against you, they come after you for the money... they don't just lie down. Out here a bonding company would not do as Gene described in a situation involving that amount of money... they pay the $12K and say see ya.
There are other types of bonds. Performance bonds guarantee that the contractor will finish the job. Payment bonds guarantee that he'll pay everyone. Bid bonds guarantee that he'll do the work for the bid he gave if he's awarded the job. These types of bonds are typical in commerical and municipal work but not in residential. Build an airport and I bet you'll need quite a few bonds.
Jason, your customers may or may not care if you have a license bond. Call your insurance carrier and see what it would cost for one. Mine is about $320 per year for the $12K.
Liability insurance is there in case the contractor or his agents cause personal injury or property damage. Cabinet door falls off and hits the HO in the face... liability claim. Contractor's laborer backs the company truck into the neighbors Benz... liability claim. Contractor's roofer leaves a flashing out and water comes in and damages the Steinway piano... liability claim. That is, of course, unless the contractor chooses to pay the damages out of pocket in order to avoid a claim against his insurance.
Liability insurance is not a warranty. Contractor installs windows and the seal fails and they fog up... no liability claim.
Jason, make sure your liability insurance is enough to entirely replace the most expensive house you ever walk into. A small $250K policy will be woefully inadequate if you cause a fire or hurt someone badly. That stuff does happen. Since you are probably not incorporated, your personal assets will be subject to seizure to satisfy a judgement if you lose and the judgement exceeds your policy.
I have had one occasion to threaten someone's bond. A roofer forgot a flashing and water came in, damaging the master bedroom ceiling in the night while the client was trying to sleep. We paid our sheetrocker and painter to replace the ceiling, at a retail cost of about $2500. I called the roofer for payment, and he balked. I told him that my next call would be to his bonding company to file a claim. I got the check in the mail the next day.
Edited 6/5/2005 3:59 pm ET by davidmeiland
I bet your clients don't know either.
Bonded can mean many different things.
http://www.thefreedictionary.com/bonded
"dj. 1. bonded - secured by written agreement
guaranteed, warranted, secured"
Basically a bond is a type of insurance and a something is put as a pledge to protect a 3rd party.
If you see an ad that talks about "bonded" employees (for example carpet cleaning company) that means that the bonding company has investigaged them enough to agree to pay any losses if they seal from the clients house. But those are limited amounts maybe $5k-10k.
And fidelity bonds are used to insure against theft by some one that handles money or control of money (for example an estate executor might need to be bonded). I could see a company getting a project manager that has authority to write checks on a clients account bonded.
And government bid projects often require a complettion bond. Those pay off if the orginal contractor goes belly up and have to get in a new contractor at higher rates.
I seriously doubt that you can get a completetion bond for the typical residential job. Possibly for the stuff in $5mill and up range, but beprepared to be investigated. That is for a true completion bond.
That is vs the $5k-$10k bonds that some state require. I am not sure, what they can pay off, but at that amount it is limited. Such as running off with a deposite.
Liability insuranse covers YOUR SCREWUPS. It would not cover things like theft by an employee. It covers think like you drilling through a gas line and the house blowing up.
If you fill that it worth it you can get bonded for theft and then tell your clients that you are bonded. But it would really be only a sales gimick.
You might check with some people in the area (HAVC, electricans, carpet cleaning, air duct cleaning, and see if any claim that they are bonded and see just what they are bonded for. But it is only theft.
We looked into getting a completion bond for a bid on a small local firehouse. The cost of the project was between $400-500k, less than many of the houses we build. Our insurance agent found a company that would cover the job for 15% of the value of the contract. It was actually a more complicated formula based on a certain percentage of the first $100k, another percentage for the next $500k, and so on, but for this job it came to 15%.
We had to demonstrate our capability to fulfill the contract based on our past history and to submit an audited financial statement. The latter cost us about $800.
As it turned out we did not get the job, though I am glad we looked into the procedure. Our agent said that the company would bond any project that we wished, residential or commercial. I can't imagine ever working for an individual who would choose to pay the 20% extra that we would charge, though the government wouldn't bat an eye.
and yet another jaded slant
bonding to me is the client willing to pay an additional 20% to feel good about things.
Since bonding is neither required nor common here, I have yet to see a bond come into play nor hear of it on anything under something like 10 million.
I've been asked once or twice if I was bonded. To me it's a warning flag indicating that somebody read an article somewhere and doesn't have any idea what they're actually asking, i.e. I probably don't want that job anyway. That perception would obviously change if bonding were a requirement, as it looks like it is in some locales.
"If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man." - Mark Twain
Hey guys, thanks for the prompt replies--I see I'm not the only one who's actually getting some rest today! (Actually I spent the morning doing punchlist on a job.) Y'all have pretty much confirmed my suspicions; that with a good record and GLI, bonding for smaller residential work (less than $50K) is next to worthless other than as an advertising advantage.
I just don't understand why so many small companies in my area claim to be "bonded", other than to make some clients feel better about choosing them. Oh well, my money's better off going elsewhere in the company's coffers LOL.
Thanks!Jason Pharez Construction
Framing & Exterior Remodeling
In Oregon, bonding is part of the license requirement, though I think its importance is overated since the requirement is so low (G/C req. is $15K).
Someone mentioned keeping Gen. Liab. equal to or above the project value. Again, in Oregon, G/C gen. liability requirement is a minimum of $500K....costs me, this year, $3500 and change. But I'm currently bidding a house that will fall in the $8-900K range. To raise my liab. to a $million will raise my premium $360.
I think that a lot of the problem may be from articles in various magazines, wherein the author, with knowledge of only his own state's rules, may say that a contractor should be "bonded", equating that to being licensed (since they are equivalent in his state), when other states don't have similar rules.
I agree. In Oregon, my license is dependent on the bond and liab. ins., so it seems redundant when I see the magnetic pickup door signs with a state license # followed by "bonded and insured."
And the Contractors Board here is notified immediately if your insurance or bond lapses or is cancelled...and your license is immediately invalidated.
Wish Motor Vehicles Department was so diligent!
You right, here are some examples.http://www.sears.com/sr/home_services/home_improvement_options.jsp?vertical=HSAt one place this have this."# Make sure the contractor is fully insured and licensed as required by law."But then"Our contractors are highly skilled and experienced, licensed and bonded where applicable by law."On Sears radio ads they just say "licnese numbers on request".http://www.nrca.net/consumer/low.aspx"Licensed and bondedMany states require that roofing contractors be licensed; some states have specific licensing requirements. In addition, some contractors are able to obtain bonding from surety companies, while others are not. Check to see if a prospective roofing contractor is properly licensed and/or bonded. Your state's department of professional regulation or licensing board will have this information."http://www.toolbase.org/tertiaryT.asp?DocumentID=878&CategoryID=1720"Licensing
Check to see that the contractor has a valid contractor's license (if applicable in your state or locality). If licensing and/or bonding is required in your area, ask to see a copy of the document(s) to ensure that the contractor is properly licensed and/or bonded. Bonding requirements vary greatly from state to state; you should find out what your state requires and exactly what any required bonding covers."In that one insurace is a separate deal."Insurance
Check to see that the contractor has valid insurance. Ask if the company is insured against claims covering worker's compensation, property damage, and personal liability. Ask to see a copy of the certificate of insurance or ask for the name of the contractor's insurance carrier and agency to verify that the contractor has this insurance. In some areas, the law requires contractors to carry such insurance"http://homesource.thebbb.org/Tips/Tips_2.aspx These companies are in an industry that may require licensing, bonding or registration in order to lawfully do business. Licensing status may change daily; the Bureau encourages you to check with the appropriate agency to be certain any requirements are currently being met.
I can see a solution to the OP's problem -- he should just say he's "bonded as required by law".
Being bonded can mean a lot of different things - as noted. There are performance bonds, fidelity bonds and some others, I believe.
Saying someone is boinded is kind of like saying they are licensed: to practice a trwde? Drive a car? Boat? etc.
In my area, there's an HI who advertises that he is "licensed." When pressed, he admits it refers to his drivers license, as there is no licensing for HI's in my state!
Maybe Jason could buy a $25 series E Bond and then say that he was bonded.
I'm also bonded with a parrot, my dogs and DW (not necessarily in that order). :-)
You are in Alabama, right?
http://www.hblb.state.al.us/index2.htm
According to this site you need a state license if you do any work over $10k.
And not talk about bonding.
And the only trade that this site shows for bonding in AL is for HVAC contactors.
http://www.contractors-license.org/
I just got the final payment for a $25K job--no homebuilder's license. When a job is gonna run over 10K, I explain to the homeowners about the ramifications of being the permit holders; more often than not I still get the job b/c the client knows they are going to pay a lot more and have to wait much longer for a homebuilder to do the job. Also, I have a solid reputation considering my short time in business.
BTW, the HBLB site you posted, I've applied for the homebuilder's license--just need a chance to study a bit and pay for it. And in AL, a homebuilder's license is basically a residential "general contractor" license.Jason Pharez Construction
Framing & Exterior Remodeling