Surety Bonds: It’s Not What You Think
When it comes to home remodeling or renovating some part of your home, the first time a homeowner usually becomes familiar with the term “surety bond” is when problems with the contractor have come up.
It’s also a time when the homeowner may find that the general contractor has no liability insurance and now has only the surety bond to look to for help in recovering damages such as shoddy workmanship or abandonment of the project. Unfortunately, the news is not good.
First and for most, a surety bond IS NOT an insurance policy but rather a guarantee whereby the surety guarantees that the contractor (called the principal) will perform the obligation stated in the bond.
There are a number of bond types available but for the purpose of home remodeling and improvements there are three that would apply:
• Contractor Licensing Bonds
• Performance Bonds
• Payment Bonds
Let’s address Payment and Performance bonds first, as they are usually the least utilized by homeowners in their home improvement projects and carry a little more protection for homeowners.
Generally, Performance Bonds guarantee the completion of the project according to the building plans and specifications. If the job is abandoned or the work is unacceptable, the bonding company has the option of hiring another contractor to complete the work or settling for damages.
Payment Bonds assures the owner that no liens for labor or materials will be filed against the property as payment is guaranteed. In both cases the homeowner pays a percentage of the contract price to obtain the surety bond and becomes the obligee of the surety.
There are many complexities to these bonds not covered here that you would want to know if considering either of these bonds. If you’d like more information be sure to follow the links at the end of this article and do your research.
The most common surety bond homeowners get involved with is the Contractor License Bond, typically as a result of the contractor violating some aspect of the Contractors License Laws.
In California, contractors are required to post some form of security deposit with the Contractors State License Board and surety bonds are typically used for this purpose although cash or certificate of deposits may also be posted.
In this scenario, a surety bond is a contract in which the surety company promises the State of California that the contractor will comply with the provisions of the Contractors State License Law (CSLL) – Chapter 9 of Division 3, starting with section 7000 of the Business and Professions Code. The contractor’s “obligation” in this case is to NOT commit any violations of the CSLB that are grounds for disciplinary action against the license. The law sets forth specific violations, which the bond will cover.
If the contractor does not comply with the conditions of the bond, a consumer and/or employee may file a claim against the bond. (B&P Code Section 7071.5) The amount of the surety bond for general contractors in California is $15,000 (Other states vary in the required amounts.)
That’s $15,000 for ALL the jobs the contractor has going, not per project. So imagine if there are several individuals who for various reasons file a claim against that one bond. Very often damages per project exceed the entire dollar amount of the bond, let alone becoming available to the multitudes.
It’s just not going to happen, which is why homeowners need to be sure their contractor of choice carries liability insurance. So once that bond is depleted the contractor must renew the bond as well as pay back the money lost to the surety in order to keep his or her license. If a complaint has also been filed with the Contractors’ State License Board (which typically is the case) an independent investigation will be conducted by the Board or regulatory agency in addition to the surety company to determine if any violations occurred.
The contractor may be cited or even loose his/her license depending on the violations. It’s not a speedy process by any means and can be frustrating to the harmed homeowners not familiar with the process but needing to get on with repairs.
The important point that homeowners need to understand is that even if the contractors license board determines violations have occurred and the contractor is cited or even revoked, that doesn’t necessarily mean that the Surety will follow suit. Their terms of determining whether a pay out is justified is not dependent on what the Board deems is a clear violation of the CSLL.In other words, the surety company will determine if it will pay the claim and the Contractors Board will decide if disciplinary action or other resolution of the complaint is appropriate.
Now this is where it gets sticky and very often consumers get slapped in the face by the surety company with a “no pay out” based on their own investigation of the facts even though their contractor was found to be in violation of the Contractors License Laws by the board. And that’s because the surety has an obligation to their principal – the contractor – to ensure that his/her license (and money!) is protected and not suspended. Their risk is very real and can quickly be consumed if not fervently protected, which is why their jurisdiction of what is “reasonably clear” is often at odds with what the CSLB determines.
The surety companies will tell you that they serve both the bond claimant and the contractor but that’s just garbage. They serve the contractor, period. You cannot “serve two masters”, as one will always get the short end of the stick and that’s the homeowners.
Many consumers have shared their frustrations with being denied pay out from surety companies even though clearly the contractor violated the license laws, damages were documented and disciplinary action pursued. It’s a no win fight as the surety companies have their so-called jurisdiction legally worded to protect their own. It’s simply not equitable no matter how much they deny it but then again, aren’t we Americans used to getting (ahem) hosed by now?”
Given that warning and using the California Contractors State License Board explanation on surety bonds, who benefits from the bond and how a homeowner files a claim against a surety bond follows:
Persons who can make a claim against the bond are listed in the CSLL (B&P Code Section 7071.5), and include:
a. Any homeowner contracting for home improvement work on the homeowner’s personal family residence damaged as a result of a violation of the CSLL by the licensee.
b. Any person damaged as a result of a willful and deliberate violation of the CSLL by the licensee, or by the fraud of the licensee in the execution or performance of a construction contract.
c. Any employee of the licensee damaged by the licensee’s failure to pay wages.
d. Any express trust fund damaged as a result of the licensee’s failure to pay fringe benefits for eligible employees.
How would a consumer file a claim against a bond?
In California, a consumer consults the CSLB’s Web site for information about the bonding company that wrote the surety bond covering the dates of the contract and the dates of the construction. Otherwise, contact your states Licensing Board for obtaining surety bond information on the contractor.
The consumer contacts the surety company, providing it with a written narrative describing the problem in detail, and attaching a copy of the contract and all other pertinent documents and information.
If a consumer is not satisfied with the response of the surety company, the consumer may take the contractor and the surety company to Small Claims Court for amounts up to $5000 against the contractor. The court can order the surety to pay up to $4,000. (Code of Civil Procedure Section 116.220(c)). Claims above $5,000 must be filed in Superior Court. (See the CSLB publication, A Consumer Guide to Filing a Small Claims Court Construction Claim.)
Be sure to visit your States regulatory agency, consumer protection division or local building departments for more information on surety bonds. In California, you can go to the CSLB web site and read up on surety bonds as well as more information on contractors and licensing requirements.
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