2.3 Financial Solvency, Credit Reports, and Surety Bonds

Why Maryland Requires Financial Solvency

The Home Improvement Law exists to protect homeowners, and a contractor who is insolvent — unable to pay suppliers, subcontractors, or judgments — is a predictable source of abandoned jobs and unpaid claims. For that reason, Bus. Reg. Title 8 requires every contractor applicant to demonstrate financial solvency before a license is issued. The MHIC exam tests both the standard itself and the famous exception built around the surety bond.

The Solvency Standard Has Two Layers

The Commission evaluates the applicant's finances relative to the scope and size of the business the applicant proposes to operate. The factors MHIC publishes are:

• Total assets — what the applicant owns
• Liabilities — what the applicant owes
• A full credit report — the applicant's complete credit history, not just a score
• Net worth — assets minus liabilities

Because that review is relative, a sole proprietor planning small handyman-scale jobs can be found solvent with modest resources, while an applicant planning a multi-crew remodeling operation needs correspondingly stronger assets and net worth.

But do not conclude that no number exists — that is a trap in the other direction. COMAR 09.08.01.19 supplies a hard benchmark on top of the discretionary review:

An applicant that does not demonstrate a net worth equal to the maximum Fund award available to one claimant for the acts or omissions of one contractor under Bus. Reg. §8-405(e)(1) must obtain a 2-year surety bond for that amount.

That maximum award is currently $30,000, so the benchmark net worth — and the bond that substitutes for it — is $30,000. Because the regulation is written as a cross-reference rather than a fixed dollar figure, the number moves automatically whenever the General Assembly raises the per-claimant Fund cap (it was $20,000 before the 2022 increase). A licensee who takes the bond route must keep the bond in force at all times unless the licensee later demonstrates sufficient net worth and the Commission authorizes cancellation, and the Commission may demand proof of solvency at any time and revoke a license if the licensee cannot produce it.

What Solvency Review Means in Practice

In practical terms, an applicant should expect to:

1. Authorize the Commission to pull a full credit report.
2. Disclose assets, liabilities, and net worth on the application.
3. Have those figures compared against the scope and size of the planned business.

Red flags in the review include heavy existing debt relative to assets, a credit history showing unpaid judgments or collections, or a net worth too thin to support the volume of work the applicant describes. The review protects both consumers and the Guaranty Fund (covered in a later chapter), because a solvent contractor is less likely to leave claims unpaid.

The Surety Bond / Indemnitor Alternative

Here is the provision the exam loves most. An applicant who does not meet the solvency guidelines is not automatically denied. Instead, the law offers an alternative path: the applicant may be licensed by purchasing a surety bond or obtaining an indemnitor (a financially responsible party who stands behind the applicant's obligations).

A surety bond is a three-party guarantee: a surety company promises to pay if the contractor fails to meet obligations. The applicant pays a premium for the bond; the surety effectively vouches for the applicant's financial responsibility that the applicant could not demonstrate alone. An indemnitor accomplishes the same thing privately — another person or entity with adequate finances agrees to back the applicant.

MHIC publishes two bond forms with its original-license application, and the exam can test the difference:

The higher bond buys privacy, not leniency: an applicant who would rather not open the books to the Commission may post $100,000 instead.

Neither the bond nor the indemnitor makes the applicant solvent on paper; they substitute a third party's financial strength for the applicant's own. And a bond is a guarantee, not free insurance: if the surety pays out because of the contractor's default, the contractor is typically obligated to reimburse the surety.

Exam Traps

Three traps appear over and over on this topic:

• Trap 1: "Every applicant must post a surety bond." False. The bond is an alternative available only to applicants who fail the solvency review. An applicant who demonstrates solvency needs no bond at all.
• Trap 1b: "Solvency has no number." Also false. The discretionary review is scope-based, but COMAR 09.08.01.19 pins the net-worth benchmark — and the substitute bond — to the $30,000 maximum Fund award per claimant.
• Trap 2: Confusing the surety bond with the Guaranty Fund. The solvency bond protects against a specific applicant's weak finances. The Guaranty Fund is a separate, Commission-administered fund — supported by contractor fees — that compensates homeowners for actual losses caused by licensed contractors. Do not merge the two concepts.
• Trap 3: Confusing the bond with liability insurance. A surety bond guarantees performance/payment obligations; general liability insurance (Section 2.4) covers bodily injury and property damage. They are different instruments, and every contractor must carry at least $500,000 of the insurance regardless of solvency.

Worked Exam Scenario

Maria applies for a contractor license to run a two-crew kitchen remodeling company. Her credit report shows an old unpaid judgment and her net worth is thin for the business size she describes. What are her options?

The Commission can find that she does not meet the solvency guidelines for a business of that scope. She may still be licensed if she purchases the $30,000 surety bond (filed with her financial statements), files the $100,000 bond instead of financial statements, or obtains an indemnitor — or she could scale down the proposed business so her finances satisfy the relative standard. What she cannot do is ignore the deficiency; solvency (or the bond/indemnitor substitute) is a condition of licensure. Nor can she start taking jobs while she shops for a bond — contracting without a license is unlawful regardless of her financial picture, so the solvency question must be resolved before the license issues and work begins.