Surety 101 - License & Permit Bonds: Explained

License and Permit (L&P) bonds are required to obtain a license or permit in a city, county, state, or federal. They are filed prior to the granting of a license for a particular type of work. There are two primary reasons that L&P bonds are required: as a source of revenue and to regulate license holder for safety & welfare of the general public. L&P bonds guarantee underlying statute, state law, municipal ordinance, or regulation. Statutory Bonds are governed by law and guarantee compliance of specific statutes, ordinances or regulations.

There are many types of L&P bonds; however, four of the basic types are Statutory, Common License and Permit - Public Safety, Non-Hazardous - Public Protection, and Hazardous License & Permit - Financial Guarantee. Statutory Bonds protect the public from incompetent performance.

Common License and Permit - Public Safety bonds protect the public against physical damage or bodily harm. Non-Hazardous - Public Protection bonds protect members of the general public against unfair practices, misrepresentation and fraudulent dealings. Hazardous License & Permit - Financial Guarantee bonds protect the public against some credit loss by guaranteeing the principal will pay sums when they become due to the public agency.

Claims can occur on any bond. An example of a claim on a L&P bond could occur if a contractor takes a deposit from a homeowner and does not perform or return to perform as contracted. This includes the contractor performing faulty work or doesn't pay taxes and contributions to the State, if the contractor does not pay or if there is a dispute of payment to suppliers or subcontractors on the jobsite.