(Written by Jack Milarch – NMHBA EVP/CEO – Originally published in the August 2008 Housing Journal)

New Contractor Code Compliance Bond Required July 1, 2009

Over the last several years there has been persistent “chatter” at the Legislative Sessions that consumers need more protection from contractors who fail to do their business in a professional and code-conforming manner. This feeling manifested itself in House Bill 199, sponsored by House Speaker Ben Lujan and promoted by Construction Industries Division Director Lisa Martinez. NMHBA was involved in these discussions and provided research and eventually suggested amendments which were incorporated into the bill that Governor Richardson signed into law. Contractors are now asking for details of what to expect.

The vast majority of New Mexico’s contractors fulfill their current financial responsibility obligation with a bond. The basis of this law change is a transformation of the current License Bond into a $10,000 Code Compliance Bond. The most significant change involves who is the potential beneficiary of the bond. The current bond is payable to the State of New Mexico, to cover penalties for code violations, while the new bond is payable to customers of contractors. NMHBA has been working with our New Mexico License Bond carrier, RLI Surety Company, on details of the new bond. A number of western states have similar consumer protection bond requirements, and because RLI Surety operates in those states they are a good resource for learning how these bonds actually work. Here is what we have learned.

Payout – Bond carriers like RLI pay out at the direction of either the relevant state agency (CID in our case) or upon order of a court, and don’t generally get involved in trying to determine the guilt or innocence of the contractor in question. The bond serves as a security device if the contractor does not pay to correct his violation of code.

At-Risk Party – The contractor who actually executed any work that has been determined to be a code violation will be the one whose bond is at risk. We had inquired as to whether the general contractor and the subcontractor would both be at risk for, say, a plumbing code violation on new home construction, and the answer from the bond carrier was that they would not allow dual claims (they call this “stacking”). Their bond forms will make that clear.

Premium – The price of the new bond has yet to be determined, but RLI estimated they would begin the new bond with pricing in the range of $200 per year. Subsequent costs will depend heavily on how many “losses” are experienced by the carrier. Any current License Bonds that expire beyond the July 1, 2009 date will have their remaining premium converted as a credit toward the cost of the new bond. Further details of the transition are yet to come from CID.

Code Violations – In our latest discussion with CID we understand they are planning on using their existing complaint resolution processes to determine whether or not a code violation has been done. The current process gives the contractor several opportunities to correct the violation. Wayne Dotson recently outlined CID’s usual methods of handling complaints for our RLI representative, who indicated that satisfies the carrier’s expectations, and RLI would simply wait for CID to determine the code violation has not been corrected and then pay out on CID orders if the contractor will not.

Reimbursing the Carrier – In the event of a payout RLI routinely allows contractors to re-pay them and have their bond reinstated. One of CID’s original goals with the legislation was to “put bad contractors out of business”, and CID management seemed somewhat disappointed that contractors could repay the carrier and retain their bond. I expect there will be more discussion on this issue because Wayne Dotson has repeatedly said that a contractor has to really mess up and refuse to fix or pay someone else to fix the code violation in order to have the bond “called” by CID.

Bond Form – The “bond form” is the actual document which describes the obligations of the various parties to the obligation. This all-important “form” has yet to be drafted because CID’s new Rules fleshing out the law have not yet been drafted. The bond form will describe and accommodate the requirements in the new rules.

New Rules – As in most legal obligations these rules and the eventual forms will be detail oriented, and NMHBA plans to be involved in drafting both the rules and the bond form. The draft rules will eventually go to one or more public hearings conducted by CID. This is the time when contractors will have their opportunity to comment on this new code compliance bond.

Implications – Subcontractors especially need to think about how they go about their work in the future. If something, including other contractor’s work, impacts your ability to accomplish a code-conforming installation your bond could be in jeopardy. This brings up thoughts of the recent effort by CID to enforce stucco codes. One of the big problems with stucco is that commonly used New Mexico details do not meet stucco manufacturers’ recommendations. Ditto for many window installations. Ditto for many foam insulation applications. Technically speaking, the failure to install stucco per manufacturers’ recommendations is a code violation. I have actually read several stucco manufacturers’ recommendations (great late night reading!) and I can tell it was their legal department who wrote them and not their technical department. Stucco installations in Heaven MIGHT meet these manufacturers’ recommendations, but very few here on earth do. Where does this leave the installer when the code dictates “install according to manufacturers’ recommendations”? We need to talk to CID more to see how this sort of thing will be handled.

For now this is about all that’s known about the new code bond requirement. We will be meeting with both CID and bond carriers about the details, and we are studying other states’ requirements and practices for guidance. If you would like to read the actual bill and the legislature’s internal analysis of this bill, please go to http://legis.state.nm.us/Sessions/08%20Regular/final/HB0199.pdf for the bill text, or http://legis.state.nm.us/Sessions/08%20Regular/firs/HB0199.pdf for the analysis. Or contact Melanie Teeter at the NMHBA office – 505-344-7072.