Understanding Contractor Bonds and Insurance: What Homeowners Need to Know

When researching contractors, you'll see terms like "bonded," "insured," and "workers' comp" thrown around constantly. But most homeowners don't fully understand what these protections actually cover — or what happens when they're missing. This guide breaks down every type of contractor financial protection, explains what it means for you, and shows you how to verify coverage.

Contractor Surety Bond

What It Is

A contractor's surety bond is a three-party agreement between: 1. The contractor (the principal who buys the bond) 2. The surety company (the company backing the bond financially) 3. The homeowner/public (the party protected by the bond)

California requires all licensed contractors to maintain a $25,000 contractor's surety bond as a condition of licensure. This bond is NOT insurance for the contractor — it's a financial guarantee that protects you, the consumer.

What It Covers

The contractor's bond covers:

• **Failure to complete contracted work** — if a contractor takes your money and doesn't finish the job
• **Violation of building codes** — if the work doesn't meet code requirements
• **Breach of contract** — if the contractor doesn't fulfill the terms of your agreement
• **Financial harm** — if the contractor's failure causes you direct financial loss

What It Does NOT Cover

The bond does NOT cover:

• Property damage caused by the contractor's work
• Injuries to workers on your property
• Quality disputes or aesthetic preferences
• Normal business disagreements that don't involve contractual breach

The $25,000 Limit

The $25,000 bond is shared among ALL claims against that contractor. If a contractor has multiple homeowners filing claims, the bond is divided among them. For large projects, the bond alone may not fully cover your losses, which is why getting everything in writing and maintaining a smart payment schedule is crucial.

How to File a Bond Claim

If you need to file a claim against a contractor's bond: 1. Document everything — contracts, payments, communications, photos of incomplete/defective work 2. Contact the surety company listed on the CSLB website 3. File a written claim with the surety company 4. The surety company will investigate and determine if the claim is valid 5. If approved, you'll be reimbursed up to the bond limit

You can also file a complaint with the CSLB, who may assist in the process.

Workers' Compensation Insurance

What It Is

Workers' compensation insurance covers employees who are injured or become ill on the job. In California, any employer with one or more employees is required by law to carry workers' comp insurance.

Why Homeowners Should Care

Here's the scenario that keeps insurance attorneys busy: A contractor working on your home sends a worker up a ladder. The worker falls and breaks his back. Without workers' comp insurance:

• The injured worker can potentially sue **you**, the homeowner
• Your homeowner's insurance may cover it — or may deny the claim
• You could be personally liable for hundreds of thousands of dollars in medical bills, rehabilitation, lost wages, and pain and suffering

With proper workers' comp coverage, the contractor's insurance handles everything. The injured worker gets medical care and wage replacement. You're protected from liability.

The Exemption Question

Contractors with no employees can file a Certificate of Exemption with the CSLB, stating they have no employees and are therefore exempt from workers' comp requirements. This is legal and many sole proprietors legitimately qualify.

However, be cautious:

• A "no employees" contractor who shows up with a crew may be misclassifying workers
• Subcontractors should carry their own workers' comp
• Ask directly: "Who will be working on my property, and are they all covered by workers' comp?"

How to Verify

1. Check the CSLB website for the contractor's workers' comp status 2. Ask the contractor for a Certificate of Insurance showing workers' comp coverage 3. Call the insurance company directly to verify the policy is active and covers the dates of your project 4. Ensure the coverage amount is adequate for the number of workers on your project

General Liability Insurance

What It Is

General liability insurance protects against property damage and bodily injury caused by the contractor's work. Unlike the surety bond (which covers contractual failures) and workers' comp (which covers employee injuries), general liability covers accidental damage and injuries.

What It Covers

• **Property damage** — a contractor accidentally ruptures a water pipe and floods your basement
• **Third-party injuries** — a delivery person trips over construction materials on your walkway
• **Completed operations** — work that causes damage after the project is finished (e.g., improperly installed plumbing that leaks months later)

Typical Coverage Amounts

Standard general liability policies for contractors range from:

• **$500,000** — minimum for small contractors
• **$1,000,000** — standard for most residential contractors
• **$2,000,000+** — for larger contractors and commercial work

For most residential projects, $1,000,000 in general liability coverage is adequate.

Important Note

California does NOT require contractors to carry general liability insurance. It's the bond and workers' comp that are legally required. However, most reputable contractors carry general liability because they understand the risk of working on others' property. If a contractor doesn't have general liability insurance, think carefully about hiring them.

Umbrella/Excess Liability

Some contractors carry umbrella or excess liability policies that provide additional coverage beyond their general liability limits. This is more common with larger contractors working on bigger projects. For a typical residential project, standard general liability is usually sufficient.

How All Three Work Together

Think of these protections as layers:

Layer 1: Surety Bond ($25,000) — Covers contractual failures (didn't complete work, didn't meet code)

Layer 2: Workers' Compensation — Covers employee injuries on the job (protects you from liability)

Layer 3: General Liability ($1M+) — Covers accidental property damage and third-party injuries

Together, they create a comprehensive safety net. When any layer is missing, you're exposed to significant financial risk.

Red Flags to Watch For

• Contractor says they're "bonded and insured" but won't provide documentation
• Insurance certificates look photocopied, altered, or outdated
• The insurance company on the certificate doesn't exist or can't verify the policy
• Contractor claims workers' comp exemption but brings multiple workers to your project
• Bond is expired or shows "No Bond on File" on the CSLB website
• Contractor gets defensive when you ask about insurance

Verification Checklist

Before hiring, verify ALL of the following:

1. Surety bond — Check CSLB website for current bond status and bond company name 2. Workers' comp — Check CSLB website; request Certificate of Insurance; call insurer to verify 3. General liability — Request Certificate of Insurance; call insurer to verify coverage amounts and policy dates 4. Additional insured — For large projects, consider requesting to be added as an "additional insured" on the contractor's general liability policy (this gives you direct protection) 5. Subcontractor coverage — Ask whether subcontractors carry their own insurance and verify

What to Do If a Contractor Is Missing Coverage

Don't hire them. Period.

A contractor without proper bonds and insurance is either unlicensed (illegal), cutting corners on legal requirements, or unable to afford basic business overhead — none of which bode well for your project. The small premium contractors pay for insurance is negligible compared to the risk you assume without it.

There are thousands of properly licensed, bonded, and insured contractors in Sacramento. You don't need to settle for one who's missing basic protections. Use our contractor search to find verified professionals.