(Written by Jack Milarch – NMHBA EVP/CEO – Originally published in the May 2009 Housing Journal)
Major Contractor’s License Bond Changes Begin Phase-In
During the 2008 legislative session the section of law that specifies what kind of bond is acceptable to meet the financial security requirement for contractors’ licenses was greatly changed. Instead of the four levels of bonds based upon the maximum single permit amount, the new law requires that every contractor obtain a $10,000 code-compliance bond. The new law does not include the option of either a cash collateral or financial statement in lieu of the bond. As before, failure to maintain the bond will result in revocation of a contractor’s license.
July 1st marks the beginning of the changeover from the current Contractor’s License Bond to the new Contractor’s License Code Bond. The current bond pays the state for fines levied against contractors and the new code-compliance bond repays a consumer for costs to correct code violations which the original contractor either refused to correct or was unable to correct.
The new code-compliance version of the bond is required when a license is up for renewal after July 1, 2009.
Highlights of the new bond:
- Claims may be filed by your customers if they feel you have committed a building code violation.
- Construction Industries Division (CID) will determine if a violation of a building code has occurred.
- According to CID, contractors will be given a “reasonable opportunity” to correct a code violation before the bond pays out.
- The surety company may pay no more than $10,000 per project, directly to the building owner.
- Claims must be made within two years following final inspection or issuance of a Certificate of Occupancy (whichever is earlier) for the project.
- Claims may be only for actual cost to repair the code violation (no legal fees).
- Contractor must repay the surety company if the surety has paid out on a bond.
There are lots of questions about how the investigation of the code violation allegation will proceed, but CID has made public statements including the following:
- An individual looking to collect monies from the bond must participate in CID’s investigation complaint process.
- CID will issue a certification of uncorrected code violation to the contractor, bonding company, and the homeowner.
- The surety companies will likely require the homeowner to submit three estimates limited to the cost of repairing the violation.
- The homeowner must notify CID in writing that a claim has been filed.
- CID has promised the surety companies that the PSI website will contain information that will publicly show a contractor’s license has been the subject of a claim of uncorrected code violation.
Once a contractor’s license bond has paid out on a claim, if the surety company has not been repaid it is unlikely they will renew a bond for that contractor. With the information publicly available for any other surety company to check a contractor’s payout status, it will be harder for a contractor to get a bond from another surety company. If a new bond is not acquired, CID will cancel the contractor’s license for failure to maintain the proof of responsibility required by the Construction Industries Licensing Act.