Surety Bond News

The Oregon Construction Contractors Board has changed a requirement for new and renewing licensees in which they must choose an endorsement for their license rather than a licensing category. The endorsements are broken down into either Residential Endorsements or Commercial Endorsements.

The reason for this change is to make it easier for contractors because they would be able to include a range of disciplines under a single license. With over 45,000 licensed contractors in Oregon, this licensing structure also helps the Construction Contractors Board (CCB) to more effectively regulate licensees.

Because of this change, the CCB is also requiring licensees to submit their contractor license bonds on a new bond form and for the amount specified according to the endorsement they choose. For those with a Dual Endorsement, two separate bonds will be required – one for residential and another for commercial.

The change was made effective July 1, 2008 for all new licensees. For existing licensees, it will come up when your license renews. If you are unsure of the bond requirement for your license endorsement, refer to the CCB Licensing Endorsement Chart. You can also refer to the renewal notice packet the CCB sends you – they are providing detailed explanations about the endorsements and the new bond requirements. If you believe your license is up for renewal and have not received a renewal notice, you should contact the CCB immediately.

Once you receive your renewal notice from the CCB, be sure to contact your bond agency to have your bond issued on the new bond form. You will need to let them know which endorsement you have chosen – Residential or Commercial, and the bond amount now being required. If you have chosen a Dual Endorsement, let your agent know that you will need both the Residential Contractor Bond and Commercial Contractor Bond.
They should already be familiar with this new bond requirement and will be able to ease you through the transition from your old bond to the new one.

If there has not been a significant increase in the bond amount, most sureties will be able to issue the new bond without additional underwriting. In the case that additional underwriting is required, be prepared to provide updated information, especially if the bond amount has increased significantly. These updates could include personal financial statements and/or business financial statements (fiscal year-end and year-to-date). In either case, the process should be fairly easy – with the assistance of the CCB’s Customer Service Unit and your bond agency.

Many contractors are new start up companies with owners that know little about surety bonds. Often, a contractor states they “need to be bonded”. Many that make the assertion do not know what it means to be “bonded”. Below, we will review what a surety bond is and the most common bond types required of contractors.

The first thing that a contractor must understand is that a bond is three-party agreement. Therefore, a bonding company will only write a bond when it is required by another party. In other words, a contractor can not obtain a bond just to claim he/she is “bonded”. Often, people make the mistake that anyone can be bonded for any reason. This of course is not true, as surety bonds require three parties and not everyone qualifies. Surety bonds are a form of credit, not insurance. Therefore, the underwriting used in surety bonding is often similar to underwriting for issuing other forms of credit such as a loan.

Contractors usually require either a contractor license bond (a specific bond type) or a contract bond (a general bond category). Both bond types guarantee precisely what their name suggests. A contractor license bond guarantees the contractor will operate per the rules and regulations of the state and is to be filed with their license. This type of bond can be required by the local or state government. A contract bond guarantees a specific contract. Contract bonds are a category of different bond types. Some examples of contract bonds are bid bonds, which guarantee a contractor will provide a performance bond if awarded the job. Performance bonds are a type of contract bond that guarantee the performance of the contractor on the job cited in the contract. There are many other types of contract bonds, but bid and performance are the most common.

At times, a contractor will be required to obtain a letter of bonding capacity from their bond producer/agent. Bonding capacity refers to a contract bond line, which consists of a single and aggregate limit the contractor is held to. For example, a contract may have a $200,000 single and $400,000 aggregate bond line. In this case, the contractor is only approved for jobs under $200,000 and may not have more than $400,000 of bonded work at any given time. Bond limits make it vital for the contractor to have a good line of communication with their bond agent/producer. This will allow the contractor to make the best use of his/her surety credit at all times.

Regardless of the surety bond type, it does not protect the contractor. In fact, in the event of a claim the surety will look to the contractor for payment of the claim and any attorney fees associated with it. A bond is form of credit and should not be viewed as property and casualty insurance. The bond is required in order to protect the obligee (usually the government), or in other words, the party requiring the bond.

With thousands of bond types available, stating “I need to be bonded” is very vague. If you need to obtain a bond, you will need to inform the bond producer what type of business you operate and who is requiring the bond of you. The answers to these two questions should be enough for your bond producer to know what type of bond you are in need of.