(Written by Jack Milarch – NMHBA EVP/CEO – Originally published in the May 2014 Housing Journal)
Code Bond Call Rules – Update
Since publication of the last Housing Journal issue, NMHBA staff and Commissioner Pat Casey have had two meetings with Construction Industries Division Director Pat McMurray, Regulation Licensing Department attorney Justin Woolf, and other CID staff to discuss the new rules for “calling” a contractor’s code compliance bond.
What is a code compliance bond? Every NM licensed contractor must now have a code compliance bond, and the bond carries a personal guarantee that any payout will be reimbursed dollar for dollar by the contractor to the bond carrier. Bonds are different than insurance in this manner. It is appropriate to think of the code bond as a pre-arranged $10,000 line of credit that is the responsibility of the contractor with the money being available to the contractor’s customers at CID’s direction. CID may order a payout up to $10,000 from the contractor’s bond. That is why these new rules are very important to our contractor members.
NMHBA and NMHBA Past President Casey have been drafting proposals and meeting with CID staff and Construction Industries Commissioners on this subject for the past several months. At the most recent meeting we were joined by a contractor license bond expert from RLI Surety, which is the bonding carrier represented by our own contractor license bond affiliate. We are encouraged that everybody agrees that creating a set of rules which are fair to truly aggrieved home owners and also to the contractors whose bonds are at risk is the goal. However there are still several points of debate.
- Will general contractors be able to claim against their subs for code violations? When NMHBA participated in the legislative debates over whether or not the code bond should be required of NM contractors, it was clear this bond was for protection of the property owner. However the law as it was passed isn’t clear on this issue and we aren’t sure how this will be resolved in the rules. As we have discussed the new rules drafts with Construction Industries Commissioners we have heard two opinions. One opinion is that subs have their own license and bond and should be liable to the general contractor for code violations. The other opinion is that the contractor who dealt with the member of the public and pulled the permit is always the one whose bond is at risk for code violations, whether or not the violation was caused by that contractor’s direct employees or whether the violation was caused by a sub of that contractor.
- Are checks mailed out before or after the code violation is fixed? NMHBA has insisted that bond proceeds are to be used for reimbursement AFTER code violations are repaired. This is to avoid giving home owners money that may not be spent on actually repairing the problem. We all know that taking the money and not fixing the problem is common with insurance payouts. If that happens with these code bond payouts it would clearly thwart the public purpose of having a bond to assure code-compliant buildings. CID has asked what would happen if the homeowner does not have the money to engage a replacement contractor or if the work required to fix code violations is extensive and exceeds the maximum bond payout of $10,000. While NMHBA is sympathetic to these possible situations we are insisting that the reimbursement be made only after the code violation has been repaired. We believe this is critical to the purposes of the basic law. We believe that doing otherwise will encourage frivolous claims and leave code violations unrepaired. CID staff and NMHBA seem to be in agreement that checks will be mailed out only after the code violation has been fixed, but we are aware that there are a variety of opinions on this topic among the voting commissioners.
- Whose bond is at risk? There is a debate over whose bond should be at risk when a sub-contractor (or maybe multiple sub-contractors) actually created the code violation. When is the general contractor (in our draft of rules we have called this contractor the “retail contractor” to clarify that this is the entity which dealt directly with the public) at risk for the subs’ mistakes? This is related to the issue of whether or not “stacking” of bonds is allowed creating payout possibilities of more than $10,000 on any one project. NMHBA has tried to avoid the possibility that retail contractors and their subs will all be hit with bond payout claims on the same code violation; however, this issue is still being debated. There seems to be broad sentiment that the retail contractor is responsible for the work of the subs and therefore that retail contractor’s bond will be at risk. At the same time it is hard to avoid the conclusion that the separately licensed and bonded subcontractor is completely innocent when the code violation resulted from that sub’s work. This thought supports the idea that the sub should be directly responsible for their work. Various commissioners have expressed different opinions on this issue.
- How much time will the original contractor have to debate and possibly fix the violation? Up to this point there have been very few code bond “calls” and one of the reasons is that CID has been trying to handle bond calls concurrently with license revocation procedures. By waiting for the license revocation process to work its way through the office of the attorney general the time for calling the code bond has often been exhausted before CID’s processes are complete. CID is trying to remedy this problem and has decided to separate the two procedures and proceed with the code bond call process first, and then proceed with the license revocation if they feel the violation warrants such action. However, there still must be procedures for inspections, notifications, hearings, and appeals before the time to claim on the bond runs out. Code violation debates often center on interpretations. Considering all that must be accomplished we are wondering how much time can be allowed for the original contractor to appeal the code violation and still have time to accomplish a repair if that is the final determination. It might be a short window so contractors will need to pay close attention. The proposed time allowances are still undergoing debate and drafting.
NMHBA will keep you informed as these rules continue to be negotiated and are eventually adopted by Construction Industries Commission.