Shaken? Stirred? A Primer on License Bond Claims in California

James Bond

Shaken?

Stirred?

A bit hot under the tuxedo collar perhaps?

Maybe it’s time for a martini. Or two.

When your project’s a mess, your contractor isn’t returning your calls, and you don’t have a license to kill it’s only natural that you would want to go after that other license: the contractor’s license bond.

However, except for smaller claims, or situations where you discover that the contractor is or might be judgment-proof, going after a contractor’s license bond isn’t necessarily the panacea many might hope it to be. Read on to learn why.

What is a license bond?

First, a license bond is not insurance. While insurance is typically limited to property damage and personal injury, a license bond covers a contractor’s violation of the Contractors State License Law. All California contractors are required to have on file a license bond (or, alternative, such as a cash deposit) with the California Contractors State License Board (“CSLB”).

What is the amount required of a license bond?

So, here’s the rub, or at least one of them. The amount of a license bond is relatively small. The current amount required of a license bond is $15,000.

In addition, the CSLB can require as a condition of licensure of a contractor which has had its contractor’s license suspended or revoked that the contractor have on file a disciplinary bond in an amount of no less than $15,000 nor more than $150,000 depending on the seriousness of the violation which led to the suspension or revocation of the contractor’s license.

And, finally, where the qualifying individual is neither the sole proprietor, general partner, or joint licensee of the contractor – or is a responsible managing officer (RMO) of a corporation and holds less than 10% of the voting stock of the corporation or is responsible managing member  (RMM) of a limited liability and holds less than 10% of the membership interests of the limited liability company – a qualifying individual bond must be filed in the current amount of $12,500.

Who can make a claim against a license bond?

Here’s another rub. Only certain “classes” of claimants may make a claim against a license bond and those are:

  1. Homeowners contracting for home improvements upon the homeowner’s personal family residence who has been damaged as a result of the contractor’s  violation of the Contractors State License Law.
  2. Property owners contracting for the construction of a single-family dwelling who has been damaged as a result of the contractor’s violation of the Contractors State License Law but only if the single-family dwelling was not intended for sale or offered for sale at the time damages were incurred.
  3. Persons damaged as a result of the willful and deliberate violation of the Contractors State License Law.
  4. Employees of the contractor damaged as a result of the contractor’s failure to pay wages.
  5. Laborers, including entities, to whom a portion of the compensation of the employee is paid by agreement with the employee or the collective bargaining agent of the employee, damaged as a result of the contractor’s failure to pay fringe benefits including, but not limited to, health and welfare, pension, vacation, travel, and subsistence.

Note: Subcontractors, material suppliers, and equipment lessors may also make claims against a license bond but only if they can show that the contractor engaged in a “willful and deliberate violation” of the Contractors State License law..

What violations of the Contractors State License Law are subject to claims against a license bond?

There are too many to list here. However, the most common are:

  1. B&P Code §7107: Abandonment of a construction project or operation without legal excuse.
  2. B&P Code §7108: Diversion or misapplication of funds or property received for prosecution or completion of a construction project or operation.
  3. B&P Code §7108.5: Failure to pay a subcontractor not later than 7 days after receipt of each progress payment, unless otherwise agreed to in writing or in the absence of a good faith dispute over the amount due.
  4. B&P Code §7109: Willful departure from or disregard of accepted trade standards or plans and specifications.
  5. B&P Code §7113: Failing to complete a construction project or operation for the price stated in the contract or in any modification to the contract.
  6. B&P Code §7114: Aiding or abetting an unlicensed person with an intent to evade the License Law.
  7. B&P Code §7117.6: Acting in the capacity of a contractor in a classification other than a classification currently held.
  8. B&P Code §7118: Entering into a contract with an unlicensed contractor.
  9. B&P Code §7119: Willful failure or refusal to to diligently prosecute a construction project or operation without legal excuse.
  10. B&P Code §7120: Willful or deliberate failure to pay money when due for materials or services rendered or false denial of any amount due or the validity of a claim with intent to secure a discount or delay.

Are there any limitations on the amount which can be recovered against a license bond?

And here’s another rub. There are three limitations on the amount which can be recovered against a license bond based on: (1) the period in which the license bond was effective; (2) the aggregate amount of claims against the license for any period; and (3) the type of claim being made against the license bond.

  1. Effective Period of License Bond: A license bond can be effective for a period as short as a year to as long as five years. A person making a claim against a license bond may only make a claim against the license bond(s) in effect at the time the alleged damage occurred. This may or may not be the same license bond which is currently in effect.
  2. Aggregate Amount of Claims: The current $15,000 license bond amount is the “aggregate” amount available to persons making a claim against a license bond, not the amount available for each claim. Thus, if you have multiple persons making claims against a license bond the aggregate amount available to those persons is $15,000, not $15,000 each.
  3. Types of Claims: Except for homeowners contracting for home improvements upon the homeowner’s personal family residence who have been damaged as a result of the contractor’s  violation of the Contractors Licensing Law, the aggregate amount available to claimants for wages and fringe benefits is currently $4,000, and all other claimants is currently $7,500.

What happens if there are multiple claims which exceed the amount of the license bond?

If there are multiple claims which exceed the amount of the license bond, the bond will be distributed to claimants in portion to the amount of their respective claims.

Are their time limits for making a claim against a license bond?

Yes. Claims for unpaid wages and fringe benefits must be made within 6 months from the date the wage or fringe benefit delinquencies were discovered and a civil action must be  filed no later than 2 years from the date the wage or fringe benefits were due.
All other claims must be made within 2 years after expiration of the license period during which the act or omission causing the damage occurred; or if a license has been inactivated, canceled, or revoked, within 2 years of the date the license would have expired had the license not been inactivated, cancelled, or revoked, so long as the act or omission causing the damage occurred prior to the date the license was inactivated, cancelled, or revoked.

How do you make a claim against a license bond and what can you expect when you do?

There are two avenues which can be taken to make a claim against a license bond: (1) file a claim directly with the license bond surety; or (2) file a lawsuit naming the license bond surety as a defendant. If you file a claim directly with the license bond surety you may be asked by the surety to complete the surety’s claim form and provide documents supporting your claim. Upon receiving this information, the surety will request that the contractor respond to the claim and there may be several back and forth communications as the surety collects information to evaluate the claim.

California’s Fair Claims Settlement Practices Regulations govern a surety’s obligations when investigating and settling a claim against a license bond.

FSPA - Communications

FSPA - Settlement

What happens if a surety pays a claim against a license license bond?

If a surety pays a claim against a license bond it is required to give notice to the contractor that it intends to pay the claim. The contractor then has 15  days to protest the payment. If the contractor protests the settlement, the CSLB will conduct an investigation, and if the evidence shows that the surety has or will sustain a loss as a result of a good faith payment by the surety then the CSLB will take disciplinary action against the contractor.

If the contractor does not protest the payment, the surety is required to provide written notice to the CSLB o the payment within 30 days of payment. A contractor then has 90 days from the date notification that payment has been made to submit proof that it has reimbursed the surety for the amount paid. Most sureties require that a contractor sign a general indemnity agreement obligating not only the contractor, but the contractor’s principal, to reimburse the surety for amounts paid.

What happens if a surety denies a claim against a license bond?

If a surety denies a claim against a license bond the claimant may sue the surety in court. As a practical matter, if a claimant sues a surety in court, the claimant will likely file suit against the contractor as well. Also, it is not uncommon that a claimant making a claim against a license bond has also filed a complaint against the contractor with the CSLB. The CSLB and the license bond surety have independent investigative responsibilities, so just because the CSLB may find that the contractor violated the Contractors State License Law, doesn’t necessarily mean that the surety will as well.

 

8 Responses to “Shaken? Stirred? A Primer on License Bond Claims in California”

  1. Dave Ross

    As a general rule, the cost of filing and pursuing a claim against a $15,000 license bond will be X times the amount recovered, where X = a painful multiplier.

    Reply
  2. Rick

    What happens if the contractor files bankruptcy and has a judgment against him?

    Reply
  3. John bedow

    My friend has a judgement for unpaid wages for 13k and it is a year old. Does he have any recourse?

    Reply
    • Garret Murai

      Hi John. Under Business and Professions Code section 7071.17 you can send the judgment to the CSLB and the contractor’s license will be suspended unless the judgment is paid.

      Reply
    • Garret Murai

      Hi Mark. Sorry for the late reply. A license bond claim is separate from a warranty claim. Thus, if you have a warranty claim you can bring a lawsuit against the contractor if the contractor does not honor the warranty but you wouldn’t be able to bring a license bond claim.

      Reply

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