The Butler Blog

What Does Licensed, Insured, and Bonded Mean?

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Last year, Chester Butler wrote an article on this subject. You can read it HERE. However, we receive this question frequently, especially from homeowners looking to have some type of construction project done at their home. Therefore, I thought I would briefly revisit this topic in a “Cliff Notes” version. However, I encourage you to go back and get more detail from Chester’s article.

The question I get is simple and goes something like this, “Brad, I’m having a new roof put on my house. The contractor says he is licensed, insured, and bonded.  What does that mean and more importantly how does it protect me?” Before going into detail, my answer is, “Probably nothing.”

Homeowners are usually concerned about two main items. First, will this contractor do quality work? Second, am I protected if something goes awry? All insurance is the same, right? If they are licensed they must have proven they can do the work? The answer to these questions is an emphatic NO!

In most cases, “licensed” simply means they paid money to the county, city, and/or state to obtain a business license. It does not mean they are qualified to do a particular job.

So what does “insured” mean? This is important. Someone saying they are insured means nothing. It does not indicate you are protected if someone is injured at your home. It does not mean if they do a poor job and cause damage, it will be repaired. All insurance policies are different. This is the primary reason the premiums are different from one policy to another.  They must have the “proper” insurance prepared by a professional and competent agent to protect both of you. Otherwise, it is simply a policy that does nothing for either party. Basically, it is just a piece of paper.

Let me give you one real life example that illustrates that just because a contractor has insurance does not mean you are protected. A small roofing contractor called and wanted a “quote” on comprehensive insurance. First, there is no such thing as comprehensive insurance.  After some discussion, his quote, for just the basic general liability, was approximately $6,000 annually. He quickly stated, “Well that doesn’t make any sense. I have quotes from another agent for $500.” After 17 years in the insurance industry and being a certified Construction Risk Insurance Specialist, rest assured there are many differences in the polices and those differences are critical.

Lastly, what does “bonded” mean? There are 10,000+ types of bonds. The bond they probably have is a simple dishonesty bond.  It does nothing to protect you and simply looks good on the side of a truck.

So how do you help protect yourself? Here are a few helpful hints.

• Ask for a certificate of insurance that shows they have general liability and workers’ compensation. I would never let anyone work on my property without giving me a Certificate of Insurance.
• Ask for a copy of their license and determine what type of license it is.
• Demand a written estimate. If they are unwilling to provide an estimate, that is a red flag.
• Have your agent and attorney look at any certificate of insurance and/or contract involved.