Contractors advertise "licensed, bonded, and insured" as a single phrase, but each word is doing separate work, and it's worth knowing which one covers which risk before you hire.
Licensed means the contractor has met your state or local government's minimum requirements to legally perform that type of work — proof of experience, sometimes an exam, sometimes continuing education. A license doesn't guarantee quality, but its absence on work that legally requires one is a real red flag, and it can affect your ability to get permits pulled or inspections passed.
Bonded means the contractor has a surety bond — essentially a third-party guarantee that if they fail to complete a job or violate the terms of a contract, there's a pool of money you (or the state) can claim against, up to the bond's limit. It protects you from a contractor who takes a deposit and disappears, or does not fulfill contractual obligations.
Insured most often refers to general liability insurance, which covers property damage or injury that happens during the job — for example, if a worker damages your flooring or gets hurt on your property. Ask specifically whether coverage is general liability, workers' compensation, or both; they cover different scenarios.
What to actually do with this: ask for the license number and verify it with your state's licensing board directly, rather than taking a contractor's word for it. Ask for a certificate of insurance naming you (or at least confirming active coverage) rather than just a verbal "yes, we're insured." A contractor confident in their standing will produce this without hesitation.