Understanding Contractor Surety Bonds

State laws commonly require contractors to have a surety bond posted as a condition of licensing. A surety bond is a contract in which the surety company that issued the bond promises that the bonded contractor will comply with the laws of the state that issued the contractor’s license. The amount of the bond is determined by the state in which the contractor is licensed. If the bonded contractor does not comply with the applicable state laws, a party that has suffered damages as a result of the violations can file a claim against the bond. If the amount of the bond is insufficient to pay the entire claim the amount that is paid will be credited against the claim, and in the event multiple parties have filed claims against a contractor’s only bond, the bond amount will be divided proportionately among all the claimants with approved claims, subject to any priorities that may be established by a state’s laws.