The Contractor License Bond Is Not Insurance!

The most common misconception of the California contractor license bond is what it does for the contractor. The truth is, the bond is not for a construction company’s protection. The legally required license bond is for consumer protection against contractors who have violated the Contractors' License Law, leading to damages. To put it simply, the bond is not insurance!

It should be stated, that just because the bond is not there to protect the contractor directly it doesn’t mean contractors shouldn’t know who can file a claim against them or what to do if a consumer or vendor does file a claim. This 2-part article will cover in-depth the who, the what, and the how of the contractor bond claim.

Every state’s licensing entity has minimum surety bond requirements for contractors. For the State of California, a contractor is required to have a $15,000 surety bond on file at all times to keep the license current and active. There are other surety obligations for different types of contractors, such as a bond of qualifying individual or a disciplinary bond. Those bonds will not be reviewed in this article.

What Must Occur for a Bond Claim to Be Filed Against a Contractor?

The Contractors’ License Law emphasizes the term “willful and deliberate” as an important requirement for the surety company and the CSLB to consider when evaluating a bond claim. Where coverage deviates from a liability insurance policy that potentially covers defective materials or faulty workmanship, someone filing a claim on a license bond must show that the violations they are claiming were “willful and deliberate.”

The bond will not pay out for everyone who attempts to file a claim against a bond. As an agency that has been around for over 50 years, CCIS has received many calls from people asking how to file a claim on a contractor’s bond for things like, “the contractor sideswiped my vehicle on the freeway and I can’t get his auto coverage to pay out.” Contractors’ License Law, section 7071.5 gives an incredibly detailed list of who can file a bond claim.

An example of a basic homeowner’s claim on the license bond would be such:

ABC Contractor takes on a large kitchen cabinet remodel job for Holly Homeowner. The contract is signed and work is slated to start July 1st. ABC Contractor obtains money from Holly Homeowner to buy materials from Woody’s Lumberyard and starts the cabinet project. As the project continues ABC Contractor becomes less and less reliable. He isn’t sticking to the construction timeline and has now not shown up to Holly Homeowner’s house for over a week. Holly Homeowner, after repeated attempts to contact ABC Contractor to come finish the construction job, decided to file against ABC Contractor’s bond for total job abandonment.

Who Can File a Claim on the License Bond?

  1. Homeowners who hire a contractor for home construction or for improvements on their personal family residence.
  2. Property Owners who hire a contractor for construction or improvements of single-family dwellings, so long as the unit was not intended for sale or offered for sale at the time the claimed damages occurred.
  3. Commercial Companies or Individuals who hire a contractor to perform building construction or tenant improvements.
  4. An Employee of the Contractor who has not received their due wages. This can include employees or entities, including a collective bargaining agent owed compensation or fringe benefits; which can include health and welfare, pension, vacation, travel, subsistence, apprenticeships and worker union’s dues that must have been included in the agreed upon overall compensation.
  5. Vendors, Suppliers or Subcontractors who have not received due compensation for supplies or services performed.

How Much Will the Bond Pay Out?

The California contractor license bond sum penalty is $15,000 total. However, who files the claim determines how much the bond has to offer toward the filed claim.

Homeowners or Property Owners filing against a contractor’s bond can potentially be awarded the full $15,000 available on the bond. The surety company will not simply pay out $15,000 to the homeowner making a claim. The owner is only entitled to damages totaling a sensible value of repairing the contractor’s violation, repairing damages caused by the repair efforts, and rectifying any damages resulting from the failure of the home to meet the permit standards. The homeowner is also entitled to recoup the cost of removing and replacing any improper repair by the contractor as well as justifiable relocation and storage expenses. If a homeowner uses the home as a primary place of business, they may also be entitled to lost business income.

Vendors supplying the contractor with building materials are afforded coverage on the license bond but not to the full limit of the bond. A claim from a vendor must be related to construction matters specifically, meaning items such as employee health insurance, a company phone line, or company office supplies are exempt from payouts on a bond claim. The maximum liability exposure for failure to pay for goods and services (CLL section 7120) is $7,500.

Due to the lower limit availability it is important to understand the situation in the event two different vendors file a claim on the bond at once. If the first vendor-filed claim is for $3,500 and the other first vendor-filed claim is for $6,000, the first claim will be paid in full and the second claim will only pay out $3,000 as that will exhaust the $7,500 bond maximum limit.

Subcontractors who perform work for the contractor and wish to file a bond claim due to nonpayment must prove to the surety company that the contractor was deliberate in the failure to pay. They must also show the contractor willfully refused to pay monies when he or she had the ability to pay or received sufficient funds for the specified construction project. This type of vendor claim is also subject to the $7,500 aggregate limit, leaving the rest as a reserve for homeowner claims.

An Employee or Collective Bargaining Agent (CBA) filing a wage and benefits claim will find the aggregate bond limit for them to be incredibly lacking. The maximum pay out for this type of claim would be $4,000 total, not per wage claim. If the $4,000 bond limit is insufficient to pay all filed wage claims, then the sum of the bond limit will be distributed to all those who filed a claim in proportion to the amount of their respective claim.

How Long Do They Have to File the Bond Claim?

The type of bond claimant not only determines how much the bond will payout, it also factors in how long they have to file a claim. The bond claim must be filed against the bond on file at the time the alleged violation occurred.

For homeowner/property owners and vendors, the statute of limitations on a bond claim is two years from the expiration of the active license period (a license period is 2 years), during which the alleged claim occurred. If the contractor’s license has been inactivated, canceled, or revoked during the 2-year license period the bond was posted, the alleged act or omission must have occurred prior to the date the license was inactivated, cancelled or revoked.

A claim filed for wage or fringe benefits has to be filed within six months from the date the wage or benefit violation was discovered, but in no event should a civil action be brought later than two years from the date the benefits or wages were due.    

A comprehensive understanding of what exposures the bond poses will allow contractors to make informed decisions. Our next piece will cover the bond claim timeline and what the contractor is responsible for before, during, and after the claim.