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Licensed, Bonded, and Insured: What Each Term Means

·AboveBoardPros Editorial Team

Licensed, bonded, and insured are three separate protections. Learn what each means, how to verify all three, and what happens if you skip this step.

Licensed, Bonded, and Insured: What Each Term Means

Licensed, bonded, and insured are three separate legal and financial protections — not one credential. A licensed contractor passed a government exam. A bonded contractor has a financial guarantee you can claim against. An insured contractor carries policies that cover property damage and worker injuries. According to the National Insurance Crime Bureau, upwards of $9.3 billion is lost to contractor fraud annually in the U.S., and most of those losses involve contractors operating without all three.

Key Takeaways

  • Three separate documents, three separate entities — a valid license does not guarantee active insurance or bonding.
  • The NICB estimates $9.3 billion in annual contractor fraud losses in the U.S. (NICB, 2024).
  • Workers' Compensation is the policy most homeowners miss — without it, you can be personally liable if a worker is injured on your property.
  • All three credentials can be verified online using state government databases before you sign.

What "Licensed" Means (and Why It Varies by State)

Licensing rules vary sharply by state. Michigan requires a state license for any residential project over $600, issued by the Department of Licensing and Regulatory Affairs (LARA). Ohio has no statewide general contractor license — only specific trades like plumbing and HVAC are licensed at the state level, with general construction regulated at the city or county level. Illinois requires no statewide general contractor license either, but Chicago mandates a local license with proof of $1–5 million in general liability coverage.

A license confirms the contractor met an experience threshold, passed a written exam, and is registered with a government authority. It does not confirm active insurance, bonding, or whether disciplinary actions are on file.

A license issued three years ago does not expire because insurance lapses. A contractor can hold a valid license while operating with canceled coverage. Always check all three separately.

To verify a Michigan license, use the LARA lookup tool at michigan.gov/lara. To verify an Ohio specialty trade license, use the eLicense Ohio portal. For Illinois, contact your local municipality's building department — there is no single statewide database for general contractors.

What "Bonded" Means (and When It Actually Protects You)

A contractor bond is a three-party financial guarantee between the contractor (principal), the bonding company (surety), and you (obligee). If the contractor fails to meet their obligations, you file a claim and the surety pays up to the bond's face value — then seeks reimbursement from the contractor.

According to CheckLicensed, the three bond types homeowners encounter most are license and permit bonds (required by states to operate legally, often $5,000–$25,000), performance bonds (guarantee project completion), and payment bonds (protect against mechanic's liens by guaranteeing subcontractors get paid).

The bond amount matters more than the word "bonded." A $10,000 license bond does not protect you if your contractor abandons a $60,000 kitchen remodel. For large projects, ask what type of bond they carry and its face value — not just whether they are bonded.

According to Palmetto Surety, you can verify bond status by contacting the bonding company directly or checking with your state licensing board, which often maintains bonding records alongside license data. Ask for the bonding company's name and bond number, then call the surety directly to confirm it is active.

What "Insured" Means: The Two Policies You Need to Ask About

Two specific policies are non-negotiable for any contractor working on your property.

General Liability Insurance

General Liability covers damage the contractor causes to your property or third parties during the work — a flooded basement, a broken window, damage to a neighbor's vehicle. According to Insureon, policy limits for residential contractors typically range from $300,000 to $2,000,000 per occurrence. The Construction Coverage general liability guide notes Chicago's general contractor license requires at least $1 million per occurrence.

The Certificate of Insurance (COI) documents this coverage. But certificates can show a policy that was valid when printed and canceled weeks later. The step most homeowners skip: call the insurance agent at a number you look up independently and confirm the policy is currently active. See our contractor insurance certificate guide for what to check line by line.

Workers' Compensation Insurance

Workers' Compensation covers the contractor's employees if they are injured on your property. This is the policy most homeowners overlook — and the one with the most direct personal exposure. As the New Hampshire Insurance Department notes, when a contractor lacks workers' comp, liability can transfer to whoever hired them. Your homeowner's insurance typically does not cover this.

Construction injury claims are among the most expensive personal injury cases in the country. The cost of defending even a routine claim can reach tens of thousands of dollars before any settlement. Request a separate Workers' Comp COI — it is a different document from the General Liability COI — and call the insurer directly to confirm it covers all employees and subcontractors on your project.

How to Verify All Three Before You Sign

Verification takes about 15 minutes per contractor and follows five steps.

Step 1: Verify the license. Use your state's official licensing board website. Michigan: michigan.gov/lara. Ohio specialty trades: elicense.ohio.gov. Illinois general contractors: contact your local municipality. Confirm the license is active and check for disciplinary actions.

Step 2: Verify the bond. Ask for the bonding company name and bond number, then call the surety directly to confirm the bond is active and check its face value. Note whether it is a license bond or a performance bond.

Step 3: Request two Certificates of Insurance. Ask for separate COIs for General Liability and Workers' Compensation. Both certificates will list the insurance company and the agent's phone number.

Step 4: Call both insurance agents independently. Look up the insurance company's main number yourself — do not use the number on the certificate, which could have been altered. Confirm the policy is active, the coverage limits, and whether any claims have reduced available coverage.

Step 5: Confirm subcontractors are covered. Ask whether the workers' comp and general liability extend to all subcontractors. Some policies exclude subs entirely, leaving you exposed.

For a broader look at contractor vetting, see our complete contractor verification guide.

Can a Contractor Be Licensed But Not Bonded or Insured?

Yes — and it happens more often than homeowners expect. Licensing, bonding, and insurance are issued by three separate entities with different renewal schedules. They do not notify each other when one lapses.

A contractor can hold a valid state license while their general liability policy has been canceled for non-payment. Their surety bond can expire without touching their license status. In Ohio, where general contracting is not licensed at the state level, a contractor can operate with no state oversight document at all.

Michigan requires residential builders to maintain insurance as a condition of their LARA license — but even there, the licensing board does not always receive real-time notice when a policy is canceled. The lag between cancellation and disciplinary action can be months. A valid license is not a proxy for active coverage.

What to Do If a Contractor Claims Coverage They Don't Have

Operating without required insurance or bonding while claiming to have it constitutes fraud in most states — a criminal offense separate from civil liability.

If you discover false credentials before work begins, stop the hiring process and document the misrepresentation in writing. If you discover it after work has started: stop payments immediately, send written notice via email or certified mail suspending work, contact your state licensing board (Michigan: LARA; Ohio specialty trades: OCILB), file a complaint with your state attorney general's consumer protection division, and report to the FTC at ReportFraud.ftc.gov if losses have occurred.

The NICB and Insurance Information Institute both note that the most effective response combines state licensing complaints with law enforcement reports, not just civil litigation.

If you see other warning signs alongside credential issues, review our list of contractor red flags before deciding how to proceed.

Why Above Board Pros Verifies This for You

The verification steps above work — but most homeowners do not know which database to check for their specific state. Every contractor in the Above Board Pros network is programmatically verified against state licensing databases before they receive a lead. We check license status, bonding, and insurance at onboarding and recheck periodically.

You should still request Certificates of Insurance before work begins. Verification is a process, not a one-time event. But starting with a pre-verified contractor means you are not starting from zero.

Frequently Asked Questions

What does it mean when a contractor says they are licensed?

A licensed contractor passed a government exam, met minimum experience requirements, and is registered with a licensing authority. Licensing rules vary by state — Michigan requires a license for projects over $600 while Ohio only licenses specific trades. Always verify the license is active and check for disciplinary actions in your state's database.

What does bonded mean for a contractor?

A bonded contractor has purchased a surety bond — a three-party financial guarantee between the contractor, a bonding company, and you. If the contractor abandons your project or causes financial harm, you can file a claim against the bond to recover losses. Bonding is protection for you, not for the contractor.

What two insurance policies should every contractor carry?

Every contractor should carry General Liability insurance (covers damage to your property) and Workers' Compensation insurance (covers employees injured on your property). Without workers' comp, you as the homeowner can be held personally liable for an injured worker's medical bills and lost wages in most states.

Can a contractor be licensed but not bonded or insured?

Yes. A license and active insurance or bonding are issued by separate entities on separate renewal schedules. A license does not lapse when insurance is canceled. Some states do not require bonding as a condition of licensure. Always verify all three credentials independently before work begins.

How do I verify a contractor's license in the Midwest?

Michigan: use the LARA portal at michigan.gov/lara. Ohio specialty trades: use elicense.ohio.gov. Illinois general contractors: no statewide database — verify through your local municipality's building department. Search by license number or exact business name. Never rely on a verbal claim from the contractor.

What should I do if a contractor has false or lapsed credentials?

Stop work and payments immediately. Document all contracts, payments, and communications. File complaints simultaneously with your state licensing board, the state attorney general's consumer protection division, and the FTC at ReportFraud.ftc.gov. If significant money has changed hands, consult a construction attorney before proceeding.

Sources

Frequently Asked Questions

What does it mean when a contractor says they are licensed?
A licensed contractor has passed a state or local exam, met minimum experience requirements, and is registered with a government licensing authority. Licensing rules vary sharply by state — Michigan requires a state license for any residential project over $600, while Ohio licenses only specific trades like plumbing and HVAC at the state level. Always verify the license is active before signing anything.
What does bonded mean for a contractor?
Bonded means the contractor has purchased a surety bond — a three-party financial guarantee between the contractor, a bonding company, and you. If the contractor abandons your project, fails to pay subcontractors, or causes financial harm, you can file a claim against the bond to recover losses. Bonding is not insurance for the contractor; it is protection for you.
What two insurance policies should every contractor carry?
Every contractor working on your home should carry General Liability insurance and Workers' Compensation insurance. General Liability covers damage the contractor causes to your property — a broken window, a flooded basement. Workers' Compensation covers the contractor's employees if they are injured on your property. Without workers' comp, you can be held personally liable for an injured worker's medical bills and lost wages.
Can a contractor be licensed but not bonded or insured?
Yes, absolutely. A license confirms the contractor met an education or testing requirement — it says nothing about whether their insurance is active or their bond is current. These are three separate documents issued by three different entities. A license does not lapse when insurance expires, and some states do not require bonding as a condition of licensure. Always verify all three independently.
How do I verify a contractor's license in the Midwest?
Michigan homeowners can verify licenses at michigan.gov/lara. Ohio homeowners can search the eLicense Ohio portal at elicense.ohio.gov for specialty trades. Illinois has no statewide general contractor license — verify through your local municipality. For any state, search the contractor's exact business name and license number. Never rely on the contractor's verbal claim.
What should I do if a contractor has false or lapsed credentials?
Stop work immediately and do not make any further payments. Document everything: your contract, all payments with receipts, and any written communications. File a complaint with your state attorney general's consumer protection division, the state contractor licensing board, and the FTC at ReportFraud.ftc.gov. If a project has already started with a significant deposit paid, consult a construction attorney — many offer free initial consultations.

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