If you’re a contractor in California, then you know about the state requirement to carry a license bond. Since it’s something you HAVE to have, you may not care too much about what amount it covers, only that you pay your bill each year and that it keeps your license active.
On October 8th, California passed Senate Bill 467, increasing the Contractor's License Bond penalty amount from $12,500 to $15,000. This is to become effective January 1, 2016.
If you currently have an active bond, No action is needed on your part; but here’s what expect from bond carriers over the next few months:
But wait, what is a bond again?
A surety bond (in this case, a license bond) is a financial instrument used by state and local government agencies, as well as commercial companies, to ensure your work. It is written for a specific penalty amount, so if something should go wrong and the surety company needs to get involved, there is a maximum amount that will be paid out.
As mentioned earlier, California, for the past few years, has required contractors to carry a license bond that has a penalty amount of $12,500.
Why is the penalty amount important?
If a contractor fails to uphold the terms stated in the surety contract, a claim can be filed against the bond. This could be anything from failing to pay wages or benefits for eligible employees, missing the project deadline, or some other violation of the contract.
Once a claim is filed, the California State License Board will investigate any claim filed against your license, and your surety company will investigate the claim filed against your bond.
If a claim against a contractor license bond is found to be valid, your surety company will repay the harmed party up to the full amount of the bond. But, unlike a traditional insurance policy, the surety company will want to be reimbursed for this payout. That means you, the contractor, will need to pay back the surety company for up to the full amount of the bond.
The increased bond penalty amount means that if a claim is paid out against your bond, you can now be responsible for paying up to $15,000 in reimbursements, rather than $12,500.
Why the change in penalty amount?
Before the bill passage, a new contractor filing for a license or an existing contractor reactivating an expired license had to meet a financial solvency requirement of $2500.
The passage of SB 467 removes this requirement, and in exchange, increases the penalty amount for the bond you need to carry.
Does this mean bonds will cost more?
Short answer? Yes. Though the percentage increase in the penalty amount may not equal the premium amount increase of the bond price. That will vary by carrier since the premium is a factor of the risk the surety company assumes.
Most carriers will be notifying each contractor directly by email and by mail of any additional premium that may be due.
Should you decide not to pay the additional premium, carriers have notified that they will then shorten the length of coverage from the original expiration date.
Do I need to stay bonded?
If you want to work in the state of California, you need a contractor’s license bond by law. The California State License Board states that a contractor’s bond is required to issue, reactivate, and maintain an active license. And if you plan on working on any project where the cost of labor and materials is greater than $500, you are required to have a license. Without a contractor’s license, and a license bond, you simply cannot work in the state of California.
What do I need to do?
If you are currently bonded, keep an eye out for notice from your surety company; you may have additional premiums due after January 1st, 2016, but you may not. And when it is renewal time, any contractor’s bond received at the California State License Board on or after that date will be required in the amount of $15,000. A bond in the amount of $12,500 will not be accepted after December 31, 2015.