Every homeowner has seen it. A contractor’s website, a yard sign, a truck door: “licensed, bonded, and insured.” Three words that are supposed to signal legitimacy. But most people hiring a contractor for a renovation, addition, or repair have no idea what any of them actually mean, what to verify, or what happens when a contractor claims all three and only has one.
What does licensed mean?
A contractor’s license is issued by a state or local authority and confirms that the contractor has met the minimum requirements to legally perform a specific type of work. Those requirements vary by state and by trade. In Texas, general contractors are not required to hold a state license, but electricians and plumbers are. In California, any contractor doing work valued above $500 must hold a license issued by the Contractors State License Board.
A licensed contractor has typically passed an exam, demonstrated experience in their trade, and agreed to follow applicable building codes. An unlicensed contractor has done none of those things.
Before hiring, ask for the contractor’s license number and verify it on your state’s licensing board website. Most states offer a free online lookup tool. Check that the license is active, not expired or suspended, and that it covers the type of work you are having done.
What does bonded mean?
Being bonded means the contractor carries a surety bond, most commonly a license and permit bond. A surety bond is not insurance. It is a three-party agreement between the contractor, a bonding company, and the public. If the contractor fails to complete the job, violates licensing laws, or causes financial harm, the bond provides funds to cover the loss up to its limit.
Bond amounts vary. Many states require a minimum bond of $5,000 to $25,000 for a general contractor’s license. On a large renovation project, it may not cover the full cost of hiring someone else to finish the work if your contractor walks away.
Some contractors also carry payment and performance bonds on specific projects, particularly commercial work. These bonds guarantee that the contractor will complete the job and pay their subcontractors and suppliers. If subcontractors go unpaid, they can file a lien against your property even though you already paid the general contractor. A payment bond protects against that.
What does insured mean?
This is the most important of the three. When a contractor says they are insured, they should at a minimum carry two policies: general liability insurance and, if they have employees, workers’ compensation insurance.
General liability covers accidental property damage and bodily injury to third parties caused by the contractor’s work. It also covers medical payments, legal fees, and defense costs when a contractor is held liable for a third-party claim. If a crew member drops a tool through your roof, knocks down a load-bearing wall, or causes a water leak that damages your finished basement, general liability insurance pays for it. Without it, you file a claim against your own homeowner’s policy, pay your own deductible, and risk a premium increase at renewal.
Workers’ compensation is a separate matter. It covers the contractor’s employees if they are injured on the job, including medical expenses, lost wages, and rehabilitation costs. If a worker falls off a ladder on your property and the contractor carries no workers’ comp, that worker may have legal grounds to sue you as the property owner. Some states allow injured workers to pursue the property owner directly when their employer has no coverage. That lawsuit lands on your homeowner’s liability policy, and serious injuries can push claims well past standard limits.
Other policies worth asking about
Beyond those two, some contractors carry additional coverage depending on the job. Builders risk insurance protects the structure under construction and materials on site while work is underway. If a contractor is driving tools and workers to your job site daily, they need commercial auto coverage because personal auto policies exclude business use. For contractors who also provide design or project management services, professional liability covers mistakes and negligence that cause financial harm, which general liability does not. On larger projects, an umbrella policy extends coverage above the standard limits if a claim turns severe.
Not every contractor needs all of these. What matters is that the policies in place actually match the work being done.
How to verify all three before signing
Saying “licensed, bonded, and insured” costs nothing. Verifying it takes about ten minutes.
- Ask for the contractor’s license number and look it up on your state’s licensing board website. Confirm it is active and covers the work being performed.
- Request a certificate of insurance (COI). This is a one-page document issued by the contractor’s insurance carrier that shows their general liability and workers’ compensation coverage, policy limits, and expiration dates. Any contractor with active coverage can produce this within a day.
- Check the certificate’s expiration dates. A policy that expired six months ago is not proof of current coverage.
- For larger projects, ask to be named as an additional insured on the contractor’s general liability policy. This means your property is specifically covered under their policy while work is being performed. Reputable carriers handle this routinely, and it costs the contractor nothing.
- Ask whether their subcontractors carry their own insurance. On any project involving multiple trades, the general contractor is responsible for every sub on your property. If an uninsured sub causes damage or gets hurt, that liability can flow up to the general contractor and then to you.
What to do if something goes wrong
If a contractor causes damage and carries valid general liability insurance, file a claim directly with their insurer. Keep records of everything: photos of the damage, the insurance certificate, the signed contract, and any written communications with the contractor.
If the contractor turns out not to be insured despite claiming otherwise, your options narrow to pursuing them in small claims or civil court, and collecting on a judgment against a contractor with limited assets is rarely straightforward.
For homeowners who want to understand what coverage a contractor should carry before hiring one, Farmer Brown Insurance Agency has placed general contractor insurance across all 50 states since 1996 and can answer questions about what policies a contractor should have in place before work starts.
This content is provided for informational purposes only and is not a substitute for professional advice. AFP editorial staff were not involved in the creation of this content.
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