Contractor License vs. Insurance: What's the Difference?

A homeowner in Houston once told me she checked that her contractor was licensed and figured that was enough. When his worker fell through her attic floor and broke an arm, she found out the hard way that a license doesn't include liability coverage. Three different protections, three different purposes. Here's what each one actually does.

Contractor License

A contractor license is issued by a state licensing board after the contractor meets specific requirements:

• Trade exam: demonstrates knowledge of building codes, safety, and trade-specific skills
• Business/law exam: covers contracts, liens, permits, and labor law
• Experience: most states require 3-4 years of journeyman-level experience
• Background check: criminal history review

What it proves: The contractor has met minimum competency standards and is legally allowed to perform the work.

What it doesn't prove: Quality of work, customer satisfaction, or current financial stability.

Contractor's Surety Bond

A surety bond is a financial guarantee — typically $15,000-$25,000 — that protects the homeowner if the contractor:

• Abandons the project
• Violates building codes
• Fails to pay subcontractors or suppliers
• Breaks the terms of the contract

A $25,000 bond means you can recover up to $25,000 if the contractor abandons your project or violates building codes. You file the claim with the bonding company, not the contractor — and the bonding company pays you directly.

Key limitation: Bond amounts are usually capped at $25,000 or less. A $100,000 kitchen remodel gone wrong won't be fully covered by the bond alone.

Workers' Compensation Insurance

Workers' comp covers medical bills and lost wages if a contractor's employee is injured on your property.

Why it matters to you: Without workers' comp, you could be sued if a worker gets hurt on your property. Homeowner's insurance may not cover it. A single back injury can result in $200,000+ in medical claims.

Exemption: Sole proprietors with no employees are often exempt. This is noted on the license record as "Workers' Compensation Exempt." It's legitimate — but it means there's no coverage if that sole proprietor gets injured on your job.

General Liability Insurance

General liability covers damage the contractor causes to your property during the work. Examples:

• A plumber floods your basement
• An electrician starts a fire during rewiring
• A roofer damages your landscaping with debris
• A subcontractor damages a neighbor's property

Important: General liability is usually NOT shown on license records. You need to ask the contractor for a Certificate of Insurance (COI) directly and call the insurance company to verify it's current.

Comparison Table

Your Three-Point Verification

Don't stop at checking the license. Verify all three:

1. License status — is it active and the right classification?
2. Bond — is there an active contractor's bond?
3. Insurance — workers' comp (on the license record) and general liability (ask for COI)