(Written by Jack Milarch – NMHBA EVP/CEO – Originally published in the December 2014 Housing Journal)

Long-Awaited Code Bond Rules Passed by Construction Industries Commission

At their November meeting CIC commissioners voted to adopt rules regarding how the Construction Industries Division (CID) will go about handling consumer complaints against a contractor, which could eventually result in a contractor’s code compliance bond being paid out to fix an uncorrected code violation.

The background on this news is that, during the 2007 Legislature, CID promoted changing what was then the required “license bond” into a new “code compliance bond”. The testimony at the time was that CID wanted consumers who were stuck with code violations on their construction projects to have access to up to $10,000 to fix those violations. The bill passed and was signed into law and since implementation of the change all New Mexico licensed contractors are required to provide CID with a code compliance bond for the benefit of their customers. Up to this point there weren’t any relevant rules on how CID or consumers would go about making a claim and there were very few successful claims against these bonds.

Here are some highlights from the new contractor code compliance bond rules.

• Responsible Contractor – In instances where only one contractor is involved in a project the responsible contractor (the contractor whose bond is at risk) is easy to determine. However on any project where there is a general contractor and various subs who may or may not have taken their own permits, the rules anticipate that it can get more difficult to determine who is going to be held responsible for an uncorrected code violation. The new rules state: “In situations where the division is unable to determine which contractor is responsible for a code violation, the prime contractor or the contractor that pulled the permit is the responsible party.”

• What If There Are Multiple Contractors Working On The Job Under The G.C.? – The assumption is that every contractor on a job site has their own bond, so how many code bonds can be “called” for defective work on any one job site? The rules discuss this possibility by stating “Only one code bond can be used to indemnify a particular code violation…per trade bureau”. We interpret this as meaning potentially four bonds can be called per project. For example, one plumbing/mechanical license bond can be called, one general construction license bond can be called, one LP Gas license bond can be called, and one electrical license bond can be called, per project. Stay tuned for more details on how this rule works out in practice.

• Time To File A Claim – The underlying law states “Claims against the bond shall be made within two years following final inspection by the governmental entity having jurisdiction over code enforcement or within two years of issuance of a certificate of occupancy for the construction project, whichever is earlier”. The new rules interpret this as the customer having two years to report a possible code violation to CID. After the customer complains to CID the agency will begin their investigation.

• Right Of Access To Job Site – Many times, with contractor complaints to CID, the customer is angry at the contractor and does not want the contractor back on the job site. Under the new rules the property owner must allow access to “perform corrective work” and if not this denial of access “shall result in dismissal of the indemnitee’s claim without further investigation.”

• Who Says It’s A Code Violation? – The rules state that CID’s inspector will make that determination, however, the “determination may be based on a municipality’s or county’s building department findings.”

• Can The Contractor Disagree? – A disagreeing contractor may appeal to the CID Director, but only if done so within 10 days of receipt of the determination. If the contractor isn’t happy with that result another appeal may be made, if done so within 20 days of receipt of the Director’s decision, to the CIC at its next meeting. After that, the rules say “the decision is final and not subject to judicial review.”

• What If The Money Available Isn’t Enough To Fix The Problem? – The rules address this possibility by stating “…the indemnitee” (person making a claim) “will be responsible for any costs above the amount the surety company releases”. What if the person making the claim doesn’t have the extra money to re-do the work? The rules don’t address this potential problem, but we can assume the job won’t get done until somebody comes up with the total amount of money needed to do the project.

• CID Notifies Bonding Company Of A Claim – If the violation is not corrected within the time frame allowed by CID, the bonding carrier will be notified of a claim. From discussions with a prominent bonding carrier rep we are led to believe that the bond will no longer be valid after such a notification and therefore the contractor will no longer be in compliance with the licensing requirements.

• Can That Contractor Just Get Another Bond? – The answer to this question is unknown at this time.

• Who Gets The Payout Check? – NMHBA lobbied the Legislature that any payout from a code compliance bond go only toward repairing the code violation and not just be a “jackpot” for finding a code violation. We were successful because the rules now state “the surety shall release the amount of the bond…by issuing a check to the contractor that performed the corrections”.   In addition there is another provision that NMHBA worked to obtain which states “Legal fees and other related costs are not collectable from the code bond disbursements.” Our intention with these provisions is that this bond will not facilitate a plaintiff attorney driven construction defect “litigation” frenzy such as has been seen in neighboring states.

• What If There Are Multiple Claimants To The Bond? – The rules state that priority of claims is determined by the time of notifying CID of a possible violation. This priority is therefore established by the time of complaint filing and not by the time of construction on the projects in question.

• Will CID Go After The Contractors’ License, Too? – The rules state that license revocation procedures will start once CID has issued a Certificate of Uncorrected Code Violation, with the Division following the normal procedures of the Uniform Licensing Act.

The opinions in this article are my observations of how this whole process will work, based on my reading of the new rules, the underlying law, and many discussions with various people involved. Although these rules were passed by the Commission they have yet to be accepted and published by the state records department, although I doubt they will be materially changed, if at all. If you would like a copy of the new rules, please contact Melanie at the NMHBA office.