Bonds are one of the least understood coverage requirements that contractors are required to have. A bond is not insurance, but just what is it then? To shed some light on the subject, you must understand that there are two basic kinds of bonds. The first is a Fidelity bond; the second is a Surety bond. Contractors only deal with Surety bonds but it is good to know the difference.
The word Fidelity means strict observance or faithfulness to promises. A Fidelity Bond guarantees that the person whose name is on the bond will honestly handle the money or whatever for you. If you buy a Fidelity bond to protect someone the bonding company will reimburse them if you steal from them. The opposite of Fidelity is Infidelity, and we all know what that means.
The word Surety means “a person or company that makes themselves responsible for another’s debts or obligations.” Think of the phrase “sure I will” that is what the bonding company says for you. If you (the contractor) do not meet your obligations, the bonding company will.
The State of California wants to make sure the consumers are protected from unscrupulous, dishonest or just plain bad contractors, so they have made it a requirement that you have a Surety bond. The bond is delivered to the State of California’s Contractors State License Board, and they keep it in your file for the entire time you have a license. The bond can only be used by the CSLB. The process goes something like this.
- Your customer files a claim with the CSLB about you.
- The CSLB sends you a letter to get your side of the story.
- The CSLB investigates the situation.
- There will be a hearing. Most of the time on the phone.
- The hearing officer will decide if you have met your obligations or not. Remember the CSLB is consumer oriented! They will take the consumers side most of the time.
- The hearing office will send you a letter giving you the opportunity to correct the problem, return the money or whatever the CSLB thinks you did wrong.
- If you do not take care of the problem, the CSLB will take money from your bond to take care of it for you.
- The bonding company will then send you a bill for the amount the CSLB has taken from your bond plus expenses.
The last part of the process is why Bonds are not insurance. An insurance company would pay the claim and move on. When you bought your bond, you signed an indemnity agreement that says you agreed to pay the bonding company back if the bond was ever used. That is why bonds are rated on the credit of the individual who is getting the bond. Great credit equals great prices on bonds. Poor credit or unpaid bond claims on a prior bond equals very expensive or no bonds at all. It is all about your ability to meet your obligations.
Easy ways to protect you from bond claims.
- Always have a contract with the client.
- Specify what materials you are going to use.
- Make the client sign off on the use of any materials you feel are substandard.
- Show up on time
- Do what you said you were going to do.
- Finish your jobs.
If a customer complains about any aspect of your work, do everything in your power to resolve the problem before they go to the CSLB. Remember the CSLB is a consumer protection agency and will lean toward protecting the public.