The Contractors State License Board (“CSLB”) was initially formed in 1929 by the Department of Consumer Affairs to serve as the primary protector of consumers who found themselves in need of construction work. As such, the CSLB has the authority to put forth changes that may be made in order to better achieve their mission of public protection. In August of 2018, legislation was passed that would assist the consumer in receiving compensation for faulty or fraudulent work.
A primary issue experienced by the CSLB was an influx of consumer claims that were unable to be finalized due to the lack of direct oversight of the cash deposits. In the past, a contractor had several options when it came to meeting the bond insurance requirements set by the CSLB. One of these methods was self-insuring by utilizing savings accounts, certificates of deposit, and investment certificates. Prior to the passing of Assembly Bill 3126 (AB 3126) in August of 2018, a contractor could elect to place a deposit on file with the CSLB in lieu of purchasing a surety bond using any of the aforementioned self-bonding options. The CSLB did not have jurisdiction to oversee those various forms of self-bonding, so some contractors were able to withdraw their deposit and avoid paying out the claims that arose. Due to this illicit practice, California legislature has moved to limit the options available for meeting the bonding requirement effective January first of 2019.
Contractors may still elect to self-insure using a cashier’s check, however the CSLB is actively pushing towards the use of a surety bond to protect the consumer. As of June 2019, the majority of contractors hold a surety bond, with only four hundred contractors being self-insured out of the several hundred thousand total active contractors. These four hundred contractors will have to ensure their current deposit meets the new requirements set forth by AB 3126 in order to prevent their license being placed into bond suspension. These contractors may place a cashier’s check on file with the CSLB or work with an insurance broker in order to purchase a surety bond.
If electing to continue to self-insure, a contractor would need to ensure that a cashier’s check is on file prior to the first of January 2020 in order to keep the license from falling into bond suspension. When submitting a new cashier’s check, the CSLB will charge a $100 service fee to retain that deposit. This cashier’s check will be held for the time that the contractor keeps their license active. If the contractor makes the decision to switch their bonding to a surety bond or remove themselves from an active license status, the cashier’s check will be held for a total of three years after the fact, to ensure that the consumer is covered during the claims reporting window.
There are several benefits regarding the use of a surety bond. The claims process is expedited when using a surety bond, due to the surety company determining claim validity and executing investigations in-house. This expedited process is beneficial for both the potential claimant and contractor as the claimant will regain due restitution and the contractor is not responsible for managing the resolution of the claim. In addition, a surety bond is considered to be a better option for contractors who do not have the available liquid assets to post a cashier’s check for the legally required posted amount. Every contractor is required to post a minimum of $15,000 coverage to meet the CSLB licensing requirements. Other bonding requirements may be imposed depending on license entity and corporation structure. Surety bond premiums are typically a fraction of the cost of posting a cashier’s check and can be a much smaller financial investment while still meeting the CSLB requirements.
Ultimately, it is the contractor’s decision to self-insure or file a surety bond. However, a surety bond will place the bonding requirements and claims responsibility in the hands of a surety company, ensuring that the contractor can focus on their work and mitigate any time spent resolving any claims.