(Written by Jack Milarch – NMHBA EVP/CEO – Originally published in the July 2011 Housing Journal)

The Contractor’s New Code Compliance Bond

While debates about the building codes have absorbed much of our attention over the last 24 months contractors, one by one, have been replacing their “contractor license bond” with a new “code compliance bond”. This is occurring because of a change that was promoted by past Construction Industries Division Director Lisa Martinez by way of House Speaker Ben Lujan’s House Bill 199, from the 2008 Legislature. That bill was signed into law by Governor Richardson, and the three year phase in period which was begun back then is now coming to an end. Many contractors already have the new bond, and by the middle of next year all contractor license holders should have a new code compliance bond in place, which means their work is subject to a “call” in the event of code violation.

For those unfamiliar with the concept of financial security bonds such as the new code compliance bond, it is best to think of such a security as a pre-arranged line of credit that may be drawn upon for payout by the bond carrier. Bonds are not the same as insurance with respect to “losses” in that the bond carrier expects to be repaid for any expenditure made by them on behalf of the bond purchaser. To facilitate this repayment the code compliance bond includes a personal guarantee of repayment by anyone involved in the construction company for which the bond is used as security. The current New Mexico Code Compliance Bond has a potential payout amount of $10,000.

During our recent NMHBA Board of Directors meeting it was reported that at least one bond payout has now occurred. This news sparked a long discussion and many questions followed. Questions included:

• How the contractor and local code officials will be involved in the “right to cure” and “certification of uncorrected code violation” process noted in the new law?

• What responsibility will the general contractor have relative to the subcontractors?

• What happens if the contractor is denied access to the project?

• How will the bonding carrier pursue repayment of their money spent to cure a code violation?

This seems like a good time for Housing Journal readers to review the basics of this new bond. The text of the relevant section of New Mexico’s licensing law is displayed below.

60-13-49. Proof of responsibility.

A. No applicant for a contractor’s license or for renewal of a contractor’s license shall be issued a license until the director determines that the applicant furnishes proof of responsibility pursuant to Subsection B of this section.

B. Proof of responsibility shall be a bond of ten thousand dollars ($10,000) acceptable to the director and underwritten by a corporate surety authorized to transact business in New Mexico. Such bond shall meet the following conditions:

(1.) The total aggregate liability of the surety for all claims shall be limited to the face amount of the bond;

(2.) The bond carrier shall provide to the division and to the licensee thirty days’ prior written notice of intent to cancel a bond required pursuant to this section. The surety for such a bond shall remain liable under the provisions of the bond for all obligations of the principal pertaining to bond terms that occur before the bond is canceled, expires or otherwise becomes ineffective;

(3.) ailure to maintain the bond for the period required by law is cause for revocation of the license; and

(4.) Payments from a bond required pursuant to this section shall only be used to cure code violations caused by a licensee, certified by the division and not corrected by the licensee. Claims against the bond shall be made within two years following final inspection by the governmental entity having jurisdiction over code enforcement or within two years of issuance of a certificate of occupancy for the construction project, whichever is earlier;

(5.) If the bond is canceled, expires or otherwise becomes ineffective during the period of a license, the division shall notify the licensee that a new bond is required. If the licensee has not provided proof of a new bond before the fortieth day after the date on which the bond was canceled, expired or otherwise became ineffective, the license shall be subject to revocation for failure of proof of responsibility.

New Construction Industries Commissioner Pat Casey noted for the Board of Directors that he believes CID does not have sufficient rules in place for him to answer many of the questions posed. At this time Casey’s opinion is that he cannot accurately predict how a complaint will be processed, however, he noted he is a member of a subcommittee of the new Commission charged with drafting policy and rules on how CID will handle roofing, stucco, and foundation settlement complaints in the future.

NMHBA has scheduled a Building Issues Committee (BIC) meeting in late July specifically to discuss issues surrounding the code compliance bond. We anticipate a representative of RLI Insurance Company, (the carrier which has written a large percentage of these bonds for New Mexico contractors), will be available to participate in the discussion. We are hoping CID management will also attend. BIC meetings are open to members and HBA Executive Officers to attend. (Voting is restricted to BIC members, however.) Please call Nancy at the NMHBA office for more details of this or any other NMHBA meeting.