Edward Farrell
The new year brought changes to California’s contractor license bond law. Every licensed contractor is required to either file with the Contractors State License Board (“CSLB” or “Board”) a bond or make a deposit in lieu of the bond. The purpose of the contractor’s license bond is to ensure that the public will receive compensation for any damages should the contractor fail to comply with the license law. Since January 1, 2016, the required bond amount was $15,000 under Cal. Bus. & Prof. Code § 7071.6. After analysis of contractor surveys and consumer data, the CSLB determined that the $15,000 bond amount was not sufficient and must be increased. This article will explain the changes to the law and why the increase was adopted.
New Developments for 2023
SB 607: License Bond Increase
Effective January 1, 2023, the required amount of the contractor’s license bond for all licensees was increased to $25,000. The increase is the result of Senate Bill 607, which was signed into law in 2021. The increase applies to the contractor license bond (from $15,000 to $25,000) and the bond of qualifying individual (from $12,500 to $25,000). The CSLB has already distributed notices of this increase to surety companies with instructions for automatically increasing all bonds currently on file with the Board. Licensees are encouraged to communicate with their respective surety to ensure that their contractor’s license bond on file with the CSLB meets the new requirements for 2023.
Why the Change? CSLB Recommendations
The Legislature’s decision to increase the bond amount follows the Board’s recommendations in a license bond study conducted under Cal. Bus. & Prof. Code § 7071.6. The Board’s study was reported to the California Legislature in January 2021 and is available to the public on the CSLB website.
The report reiterates that the primary purpose of the license bond is to protect homeowners from grievous injury by the acts of contractors. [1] With that goal in mind, the CSLB set out to determine whether the prior bond amount of $15,000 was insufficient to provide adequate consumer protections. Other considerations by the CSLB also included whether or not raising the bond amount would create a “barrier for licensure” for unlicensed contractors. As defined in the Report, “The barrier to licensure concern of increasing the bond would be the increase in the cost of the bond precluding new people from entering the construction field, which not only keeps such individuals from earning a living but may increase the cost of construction services by limiting access to the number of available contractors.” [2]
Ultimately, the Report concluded that the old contractor’s bond amount of $15,000 was not sufficient. The Board recognized that circumstances and experiences in the construction industry had changed which made the $15,000 amount a low bond threshold. The Board pointed to specific CSLB consumer complaint data that showed increased contract values and increased average costs of the typical home remodel project which far surpassed $15,000. “The evidence shows that the $15,000 bond covers slightly over half of the residential construction contracts subject to CSLB complaints today. These facts demonstrate that an increase in the bond is necessary.” [3] Approximately 48.9% of consumer complaints to the CSLB between 2015-2020 involved construction contracts valued over $15,000. [4] The Report also included data indicating that nearly 20% of consumer bond claims maxed out the $15,000 limit which evidenced that there was conceivably less money available to a homeowner with a good faith claim.
The CSLB also concluded that at higher bond amount would not create a barrier to licensure by unlicensed contractors because the increase would not trigger underwriting concerns by sureties. The Report states, “Concerns about barriers to licensure associated with raising the license bond can be addressed if it is raised below the point that would require underwriting. The research conducted for this study suggests that this amount is $25,000. That amount could ensure that the bond serves the dual functions of increasing the available funds for consumers harmed by contractors while ensuring that the bond is still accessible for all applicants to meet the minimum standards of licensure. It would not serve the goal of limiting barriers to licensure if the license bond required case by case underwriting of the personal financial affairs of applicants for contractor’s licenses.” [5]
The $10,000 increase was the Board’s recommended compromise between preserving the main function of the bond to protect consumers while ensuring that the cost of the bond is still accessible for applicants to meet the minimum CSLB standards of licensure.
The Take Away: California License Bond Requirements
Contractor license bond requirements are an evolving issue within California construction law. By statute, the CSLB will continue to assess and evaluate the effectiveness of bonds and whether they continue to serve consumers without penalizing contractors and licensees. Future proposals remain to be answered. For instance, the Board’s Report reserved comment on whether a tiered bond system that prescribes different bond amounts by type of license classification would be advisable in the future. The CSLB will also have to grapple with competing interests between consumers, contractors, and sureties to strike the right balance on the required bond amount. As such, licensees, contractors seeking CSLB licensure, and legal professionals are advised to keep abreast of the contractor license bond law to better conduct their business and advise their clients.
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[1] Contractors State License Board SB 610 (Glazer) License Bond Study, Page 7 [https://www.cslb.ca.gov/Resources/Reports/SB610STUDY.pdf] (last visited Dec. 5, 2022).
[2] Id. at p. 16.
[3] Id. at p. 35
[4] Id. at p. 23
[5] Id. at p. 36
