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On October 8th, 2015, California governor Jerry Brown signed Senate Bill 467 into law that increases the license bond requirement from $12,500 to $15,000 for California contractors, among other new provisions. The law will take effect January 1st, 2016, though more information regarding implementation details will likely follow shortly. While several bills signed into law this year have been highly debated, SB 467 does not appear to be one of the more controversial bills passed in recent times, having cleared the Assembly with a vote of 40 in favor, 0 against prior to the governor signing it into law.
The contractors license bond requirement has been a part of state law for decades and the bond amount has generally increased over time. The early 1980’s saw the bond requirement stand at $5,000 and the most recent bond increase to $12,500 occurred January 1st, 2008. Interestingly, the Bond of Qualifying Individual (BQI) for California will remain at $12,500.
The contractors license bond benefits a contractor’s customers or employee’s if they are financially damaged as a result of a contractors actions such as faulty construction, a license law violation or a failure to pay employee wages.
In addition to increasing the bond requirement, the law also amends section 7067.5 of the Business & Professions code by removing the financial solvency requirement. Under current law, new applicants or licensed contractors reactivating, reissuing or reinstating a license are required to show proof of financial solvency in the amount of $2,500. SB 467 repeals this provision and replaces it with the $15,000 license bond requirement.
Lastly, SB 467 extends the expiring provisions granting the Contractors State License Board the duty and responsibility to license and regulate California contractors from January 1st, 2016 until January 1st, 2020.
Surety bond companies generally price bonds based on their risk exposure, so an increase in the bond amount from $12,500 to $15,000 will likely result in a change in premium, though the impact may not be as straight forward as a 20% premium increase to match the 20% increase in the required bond amount. In recent years, many new surety bond companies have begun offering contractors license bonds and the increased bond premiums may lead to increased competition, which could place downward pressure on pricing. However, each surety may face an increased risk exposure of not being fully repaid on bond claims as the amount of bond exposure increases, which could place upward pressure on pricing.
With each of these factors in mind (and many others not discussed), contractors will likely experience some form of premium change, though the total effect is difficult to determine and will vary between each surety. Also, in terms of total financial impact, contractors with marginal credit or other challenging factors such as prior bond claims stand to be more affected than those with solid credit and a clean license history. As such, maintaining a clean credit and license history for California contractors is now more important than ever.
Existing contractors should contact their bond agent, broker or existing bond company for instructions on maintaining compliance if they have an existing bond in place for the amount of $12,500. Each bond company will likely have a different procedure for bringing an existing bond into compliance once the new law takes place and will notify contractors accordingly prior to the new law taking affect. With this in mind, many surety’s such as Suretec, HCC Surety and Wesco are implementing a practice whereby they will automatically increase a bond from $12,500 to $15,000 and send out a corresponding bill to the contractor for the prorated amount of this change. Should the contractor not make this payment, the bond term will be truncated, though the $15,000 bond will still be filed with the CSLB effective January 1st, 2016.
For a complete list of surety’s that have filed a blanket endorsement with the CSLB to increase their bonds from $12,500 to $15,000, please click here.
Contractors can also contact the Contractors State License Board which will be able to provide further instructions on bond compliance under the new law in the coming months.