Construction contractors whose work involves repairing, maintaining, or installing heating, ventilating, and air conditioning (HVAC) systems need to understand their bonding and licensing requirements. Many states require HVAC contractors to be licensed and bonded. Even in states that do not require HVAC licenses, local governments might. HVAC bonds are commonly required as a condition of licensing by state and local governments. Here is some information about HVAC bonds that contractors need to understand.

What Is an HVAC Bond?

An HVAC bond is a type of license surety bond that is commonly required by state or local licensing bodies before a contractor can obtain a license to work as an HVAC contractor. Surety bonds are legal contracts through which the following three parties agree on how risk will be handled:

 • Principal - The contractor who is required to post the bond

 • Obligee - The state or local licensing body that requires the contractor to post the bond

 • Surety - The bond company that issues the bond to guarantee the principal's ethical business operations and compliance with the law

While some contractors confuse surety bonds with insurance, there are distinct differences. Insurance policies transfer risk from the policyholder to the insurance company and protect the insured against liability in the event of a loss. By contrast, a surety bond protects the public from the bondholder's potential malfeasance and assigns the risk to the contractor rather than the public.
 

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When an HVAC bond is issued, the contractor will have to sign an indemnification agreement with the surety. This is an agreement by which the contractor agrees to hold the bond company harmless if a bond claim is filed. If the HVAC contractor breaks the law or violates their contractual duties, any party harmed by the contractor's actions can file a claim against the bond. The surety company will investigate the filed claim to determine whether it is valid. If it is, the bond company will pay the claim. However, the indemnification agreement will require the contractor to repay the surety in full or face legal action.

 Why Are HVAC Bonds Required?

Government licensing agencies require HVAC bonds to ensure that the contractors they license are qualified to perform the work, have the required training and education, and have stable businesses. HVAC bonds protect the public from potential misconduct and shoddy work. They also help to ensure that HVAC professionals will comply with all of the regulations and laws that govern the HVAC industry. Since both licenses and surety bonds expire, the surety bond requirement means that HVAC contractors who want to renew their licenses will also have to renew their bonds. If a contractor has violated the conditions and terms of the bond, the surety company might not renew it. This can help the licensing authority by screening out contractors whose licenses should not be continued.

How Do You Get an HVAC Bond?

Contractors who have completed the training and education requirements in their states for becoming an HVAC contractor can apply for an HVAC bond through a surety company. Many bond companies have online application processes that allow contractors to submit their applications online. The surety company might also ask the contractor to submit additional documentation about themselves, their credit, their business, and their experience.

Once the application and accompanying materials are submitted, the surety company will review everything during an underwriting process. HVAC bond underwriters evaluate the applicant's credit, business experience, reputation in the industry, and other factors to assess the level of risk the surety company would take on if it approved the bond application. If the underwriters determine the contractor poses a low level of risk, the bond application will likely be approved. By contrast, if the contractor is determined to pose a high level of risk, the bond application might be denied.

How Much Do HVAC Bonds Cost?

How much an HVAC bond will cost depends on the posted amount your state or local government requires and the degree of risk you are deemed to pose. However, you won't have to pay the face value of the required bond. Instead, you will have to pay a bond premium, which is a small percentage of the bond's maximum value.

If you have great credit, strong business financials, experience, and a solid reputation with others you've worked with in the past, you can anticipate being assessed as carrying a low level of risk. In that case, your surety bond premium quote might be as low as 1% of the bond's maximum amount. For example, if your state requires you to post a $15,000 HVAC bond to get your license, a 1% premium would mean you would have to pay $150 to purchase your bond.

If you have a low credit score, little experience, poor financials, or a problematic reputation, your level of risk might be assessed as high. In that case, the surety company might deny your bond application. If it's approved, you might be required to post a higher premium of 10% or more. In the case of a $15,000 bond, this means you might have to post up to $1,500 or more to secure your bond.

Bond Renewals

Like HVAC licenses, HVAC bonds expire every year or two. Instead, you will need to renew both your bond and your license according to the schedule required by your state and bond company. It is a good idea to begin the renewal process early to make sure your bond and license don't lapse. If your bond expires without being renewed, your license could be suspended and prevent you from legally operating your business.

While having to pay a premium to renew your bond and a renewal license application fee every year or two might seem excessive, you can reduce your surety bond costs by improving your credit and avoiding bond claims. If you had to pay a higher premium to obtain your bond initially but have since taken steps to increase your credit score, you might secure a lower rate when it's time to renew your bond. This provides an incentive for you to operate your business ethically, follow the law, and maintain a good credit score.

Being aware of the HVAC surety bond requirements that affect you and making sure to comply with them can give you peace of mind, contribute to building a strong reputation, and help your business thrive.

Author Name: Todd Bryant
Author Bio: Todd Bryant is a graduate of Germantown Academy and the University of Pittsburgh College of Business Administration Honors College. He has been President of Bryant Surety Bonds, Inc., an A+ rated Business with the Better Business Bureau, since 2007. Licensed as a producer with the Department of Insurance, he has been published in the National Association of Surety Bond Producers newsletter and on numerous authoritative publications such as The Washington Post, Entrepreneur.com, Azcentral.com and many more.

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