When a Contractor Loses Their License Without Realizing It - The Hidden Trap of Lacking Workers’ Comp Coverage
In California, every licensed contractor who has employees is required by law to carry workers’ compensation insurance. What many contractors don’t realize is that if they’re required to have workers’ comp insurance but don’t, their contractor’s license is automatically suspended by operation of law—no notice from the Contractors State License Board (CSLB) required.
This rule comes from Business and Professions Code section 7125.2, which says that a license “is automatically suspended” during any period when the licensee is required to have but fails to maintain workers’ compensation insurance.
The California Court of Appeal confirmed this in Wright v. Issak (2007) 149 Cal.App.4th 1116, where a contractor lost his right to payment because his workers’ comp coverage had lapsed. The court held that the lack of insurance meant the contractor was not licensed during the job, even if he had been properly licensed before and after.
The Consequences - No Pay and Possible Disgorgement
If a contractor performs work while unlicensed—even unknowingly—the consequences are harsh. Under Business and Professions Code section 7031, the contractor:
Cannot recover any compensation for work performed while unlicensed; and
May have to disgorge (return) all money paid for that work if the client sues to recover it.
That means a contractor who lets their workers’ comp insurance lapse, even briefly, could find themselves forced to refund every penny they were paid on the project.
Bottom Line - Maintaining workers’ compensation coverage isn’t just about protecting employees—it’s essential to keeping your license valid. A short lapse can silently suspend your license and lead to devastating financial consequences.