Tennessee Contractor License Bond: A Comprehensive Guide

October 18, 2021

This guide provides information for insurance agents to help contractors on Tennessee Contractor License Bonds

At a Glance:

• Average Cost: 1% of the bond amount, based on the business owner’s credit and the business’s financial standing
• Bond Amount: 
  • $500,000 for contractors whose license has a monetary limit of $3 million or less
  • $1 million for contractors whose license has a monetary limit of more than $3 million
• Who Needs it: All Tennessee contractors who do not meet the financial requirements for their desired limit on their contractor license
• Purpose: To ensure the public will receive compensation for any damages should the contractor fail to comply with contractor licensing law
• Who Regulates Contractor License Bonds In Tennessee: The Tennessee Department of Commerce

Background

Tennessee statute 62-6-103 requires all contractors who work on projects costing $25,000 or more to obtain a license with the Department of Commerce. The Tennessee legislature enacted the licensing laws and regulations to ensure that contractors engage in ethical business practices. To provide financial security for the enforcement of the licensing law, contractors who do not meet the net worth, working capital, and experience requirements must purchase and maintain a surety bond to be eligible for licensure.

What is the Purpose of the Tennessee Contractor License Bond?

Tennessee requires contractors who do not meet the financial responsibility and experience requirements to purchase a surety bond as part of the application process to obtain a business license. The bond ensures that the public will receive compensation for financial harm if the contractor fails to comply with the licensing regulations set forth in Tennessee code Title 62 Chapter 6. Specifically, the bond protects the public in the event the contractor breaches any contracts made with consumers or engages in any acts of fraud. In short, the bond is a type of insurance that protects the public if the contractor breaks licensing laws.

How Can an Insurance Agent Obtain a Tennessee Contractor License Surety Bond?

BondExchange makes obtaining a Tennessee Contractor License Bond easy. Simply log in to your account and use our keyword search to find the “contractor” bond in our database. Don’t have a login? Enroll now and let us help you satisfy your customers’ needs. Our friendly underwriting staff is available by phone at (800) 438-1162, email, or chat from 7:30 AM to 7:00 PM EST to assist you.

At BondExchange, our 40 years of experience, leading technology, and access to markets ensures that we have the knowledge and resources to provide your clients with fast and friendly service whether obtaining quotes or issuing bonds.

Who is Required to Purchase a Bond?

Tennessee only requires contractors who do not meet the required financial responsibility and experience requirements to purchase a bond. All Tennessee contractor licenses have a maximum “monetary limit” that prohibits contractors from accepting jobs costing more than the limit amount. Contractors determine their license’s limit by taking ten times the lessor of their combined working capital, net worth, and experience. If the contractor wants a higher license limit than they qualify for, then they may purchase a surety bond in the following amount:

• $500,000 if their license has a limit of $3 million or less
• $1 million if their license has a limit of more than $3 million

Is a Credit Check Required for the Tennessee Contractor License Bond?

Surety companies will run a credit check on the owners of the construction company to determine eligibility and pricing for the Tennessee Contractor License bond. Contractors with excellent credit and work experience can expect to receive the best rates. Contractors with poor credit will likely be declined. The credit check is a “soft hit”, meaning that the credit check will not affect the contractor’s credit.

How Much Does the Tennessee Contractor License Bond Cost?

The Tennessee Contractor License bond costs 1% of the bond amount per year. Surety Companies determine your customer’s bond eligibility by examining factors such as their credit score and business financial statements. The surety company will want to see strong credit and some liquidity (5% of the bond amount at minimum) to provide approval. Below is the cost for the Tennessee Contractor License Bond:

Contractor License Bond Cost

How Does Tennessee Define “Contractor?”

To paraphrase Tennessee statute 62-6-102, a contractor is an independent business that performs construction services on a project costing $25,000 or more.

How Do Contractors Apply for a License in Tennessee?

Contractors in Tennessee must navigate several steps to secure their license. Below are the general guidelines, but contractors should refer to the application instructions for details on the process.

License Period – All Tennessee Contractor Licenses expire two years from the date of issuance and must be renewed before the expiration date

Step 1 – Designate a Qualifying Agent

Tennessee statute 62-5-115 requires all contractors to appoint a qualifying agent who has sufficient knowledge of the construction business and who can handle the day-to-day operations of the business entity. Qualifying agents may be a company owner, stockholder, or full-time employee.

Step 2 – Pass the Exams

The company’s qualifying agent must pass both a business and law as well as a trade exam. Qualifying agents can register for the exam here. Each exam is open book and open note and costs $55.

Step 3 – Prepare a Financial Statement

License applicants must hire a certified public accountant (CPA) to prepare a company financial statement. The statement must be reviewed if the contractor’s license limit is $1.5 million or less, or audited if the limit is more than $1.5 million.

Step 4 – Purchase a Surety Bond

Contractors whose financial statement prevents them from obtaining their desired license limit or shows a discrepancy may purchase and maintain a surety bond in the following amount:

• • $500,000 if their license has a limit of $3 million or less
  • $1 million if their license has a limit of more than $3 million

Step 5 – Obtain a Letter of Reference

All license applicants must obtain a letter of reference from either a past employer (construction industry), client, or code official who has inspected their work.

Step 6 – Purchase Insurance

Contractors must purchase and maintain liability insurance in an amount equal to their license’s monetary limit. Additionally, contractors with employees must purchase workers’ compensation insurance.

Step 7 – Register with the Secretary of State

Contractors must register their business entity with the Tennessee Secretary of State

Step 8 – Complete the Application

Tennessee allows contractors to submit their license applications online here. Applicants who cannot complete the application online can request a paper copy. Contractors must pay a $250 application fee, and submit an affidavit signed by all company officers and the qualifying agent.

How Do Tennessee Contractor Renew Their License?

Contractors can renew their licenses online here. All Tennessee Contractor Licenses expire two years from the date of issuance and must be renewed before the expiration date.

What Are the Insurance Requirements for the Tennessee Contractors License?

Tennessee requires contractors to purchase and maintain liability insurance in an amount equal to their license’s monetary limit. Additionally, contractors with employees must purchase workers’ compensation insurance. Contractors whose financial statement prevents them from obtaining their desired license limit or shows a discrepancy may purchase and maintain a surety bond in the following amount:

• $500,000 if their license has a limit of $3 million or less
• $1 million if their license has a limit of more than $3 million

How Do Tennessee Contractors File Their Bond?

Contractors should submit the completed bond form, including the power of attorney, electronically here. The contractor license surety bond requires signatures from both the surety company that issues the bond and the primary owner of the construction company, as well as witness signatures for each party. The surety company should include the following information on the bond form:

• Legal name of entity/individual(s) buying the bond
• Surety company’s name and state/city of incorporation
• Bond amount
• Date the bond is signed

What Can Tennessee Contractors Do to Avoid Claims Against Their Bond?

To avoid claims on their bond, contractors in Tennessee must follow all license regulations in the state, including some of the most important issues below that tend to cause claims:

• Do not engage in any acts of fraud or misrepresentation
• Faithfully honor all contractual obligations

What Other Insurance Products Can Agents Offer Contractors in Tennessee?

Tennessee requires contractors to obtain liability insurance. Contractors with employees must purchase workers’ compensation insurance. Bonds are our only business at BondExchange, so we do not issue liability or workers’ compensation insurance, but our agents often utilize brokers for this specific line of business. A list of brokers in this space can be found here.

How Can Insurance Agents Prospect for Tennessee Contractor Customers?

Tennessee conveniently provides a public database to search for active contractors in the state. The database can be accessed here. Contact BondExchange for help developing a marketing piece. Agents can also leverage our print-mail relationships for discounted mailing services.