As a contractor involved with installing heating, ventilation, and air conditioning (HVACR) systems, it is important to understand your regulatory and legal requirements especially when it comes to surety bonds. Even if you are a veteran HVACR owner, I have found that many contractors are misinformed when it comes to surety bonds. Most of you are aware that HVACR technicians are required by the U.S. Environmental Protection Agency (EPA) to obtain certifications or licenses before they can legally operate. Many states, cities, and counties also require HVACR contractors to obtain licenses. A common condition of licensing is to get an HVACR surety bond. Lastly, it’s important to understand the facts about bonds, both for you and your HVACR technicians and apprentices. 

Below, I have outlined everything you need to know about HVACR surety bonds as a contractor.

What are HVACR Surety Bonds?

HVACR bonds are surety bonds that might be required as a condition of obtaining a certification or license to work as an HVACR contractor. 

A surety bond is an enforceable agreement that involves three parties – the HVACR contractor who needs to obtain the bond, the governmental body that requires the bond as a condition of obtaining a license, and the surety company that issues the bond. 

These three parties are referred to legally as:

    •    Principal - The HVAC contractor who needs the bond

    •    Obligee - The licensing group that requires the bond

    •    Surety - The bond agency that issues the bond

When the surety company issues an HVACR bond, the bond serves as a guarantee that the contractor will abide by the law and the regulatory requirements for government HVACR contracting work. It also guarantees that the contractor will operate their business ethically and will perform their work as promised.

Misconceptions vs. the Truth About HVACR Surety Bonds

A common misconception is that an HVACR surety bond is another type of insurance. However, insurance and surety bonds function quite differently. While your commercial general liability insurance protects you from liability in the event of a loss, your HVACR surety bond will instead protect your customers, and the government, against any illegal or unethical conduct in which you might engage during the course of doing business.

If you violate the law or the terms of your contracts, a claim can be filed against your bond. Surety companies investigate claims to determine their validity. While a surety company will pay a valid bond claim, you will be legally obligated to reimburse the surety in full for all amounts it pays on your behalf.

This is because you will be required to sign an indemnity agreement to receive a bond from the surety company. The indemnity agreement serves as a “hold harmless” agreement. This means you will agree to hold the surety harmless for any losses that might be incurred through a bond claim. If you fail to repay the surety for a valid claim against your bond, the surety can come after you in court to recover everything it had to pay on your behalf, as well as any legal fees it incurred to recover compensation from you.

Your HVACR surety bond guarantees prospective clients from monetary losses. If you fail to fulfill your contracts or violate the regulations and laws that govern the HVACR industry, for instance, your clients can recoup their losses through bond claims.

How Much Does the HVACR Bond Cost?

The bond amount you might have to post to obtain an HVACR license will depend on your state or local jurisdiction. However, you won't have to pay the entire amount to purchase your bond. For example, if you must post a $15,000 HVACR bond, you will only have to pay the bond premium the company quotes you instead of $15,000.

If you have excellent credit and a good business reputation, your quote could be as little as 1%. If your credit is poor, your quote might be up to 10% or more.

How to Get an HVACR Bond

To get an HVACR bond, you simply need to apply through a surety company. Many bond companies have online applications to make the process fairly simple. Once you submit your application, it will go through underwriting before the surety will agree to approve it.

Remember, surety bonds are a form of credit since the company agrees to pay valid claims for you, but you will then have to repay the surety. Because of this, a bond company will want to evaluate the risk it would face if it agrees to underwrite your bond. As a part of the underwriting process, the surety will want you to provide information about your credit and your business.

If your credit score is excellent and your business is stable, the surety company might give you a low bond premium quote. If your credit score is poor, you might either receive a high premium quote or you could be denied.

Why Every HVACR Contractor Needs a Surety Bond

Licensing authorities require HVACR bonds to ensure the contractors that they license, or permit, understand the legal requirements and will comply with them. Both surety bonds and licenses expire and need to be renewed. If a contractor violates their bond or license conditions, the licensing authority likely won't renew the contractor's HVACR license. Requiring a surety bond as a condition of licensing helps governmental licensing bodies ensure the contractors that they license are ethical and legally compliant. The bonds also are designed to protect the public against malfeasance and ensure they are compensated if they lose money due to errant action or negligence on the part of a contractor.  

Bottom line: You need to get bonded to perform work as an HVACR contractor because you can't get a license to run your business legally without doing so in most jurisdictions. If you complete HVACR work and do not have a license on your own, it is illegal.

Do your research. The licensing requirements for obtaining certifications vary from state to state. You will need to check with your state to find out its requirements. However, importantly, even if your state doesn't require HVACR contractor licensing, you might be required to get bonded by your city or county or in a next-door county in which you might want to perform work. So, do your homework to avoid any issues.

Additional Benefits to Getting Bonded

If you are not required to get licensed and bonded, getting an HVACR bond might still offer some benefits. Being bonded adds trust and credibility to your business and shows potential clients that you operate a stable and trustworthy operation. The additional effort could help you to secure contracts that might otherwise be unavailable to you.

Lisa Trymbiski is the manager at Bryant Surety Bonds leading a team of talented professionals assisting clients in the surety bond industry. Education, superior service, and compliance are her top priorities in the completion of a successful business transaction.