BILL ANALYSIS
AB 2267
Page 1
Date of Hearing: May 4, 2010
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Mary Hayashi, Chair
AB 2267 (Eng) - As Amended: March 15, 2010
SUBJECT : Contractors: license requirements: bond.
SUMMARY : Reduces the maximum amount a material supplier can
recover through a contractor's license bond (CLB) from $7,500 to
$4,000, and increases the maximum recovery limit a property
owner contracting for single-family dwelling construction can
recover through a CLB from $7,500 to $12,500, as specified.
EXISTING LAW :
1)Provides for the licensing and regulation of contractors by
the Contractors State License Board (CSLB).
2)Stipulates that failure by a licensee to pay money due for
materials or services when sufficient funds are available
constitutes a cause for disciplinary action.
3)Requires a licensee to have a CLB on file in the amount of
$12,500 as a condition of licensure, in the event of
suretyship.
4)Limits the maximum amount a material supplier can recover
through a CLB to $7,500.
5)Specifies that any amount of the CLB in excess of $7,500 will
be exclusively for the benefit of homeowners damaged as a
result of a violation of Contractors State License Law (Law).
6)Subjects a licensee to suspension or revocation of a
contractor's license where the licensee fails to maintain a
sufficient CLB.
7)Limits the maximum amount a property owner contracting for
single-family dwelling construction can recover through a CLB
to $7,500.
8)Authorizes mechanics, persons furnishing materials, artisans,
and laborers to place a lien upon the property upon which they
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have bestowed labor or furnished material for the value of
labor and material furnished, if they have not been
compensated.
FISCAL EFFECT : Unknown. This bill is keyed non-fiscal.
COMMENTS :
Purpose of this bill . According to the sponsor, "The need for
this bill is due to an ever-increasing amount of claims filed
against CLBs by material or equipment suppliers which, in turn,
results in less money being available in the CLB to cover
consumer claims. This bill also increases the maximum recovery
amount for a property owner contracting for the construction of
a single-family home from the current $7,500 limit to $12,500."
Background . Prior to January 1, 2004, a contractor was required
to have a $7,500 CLB on file. That amount was increased to
$10,000 and subsequently, to the current amount of $12,500,
through SB 1919 (Figueroa), Chapter 1123, Statutes of 2002. At
present, a contractor must post a $12,500 CLB to protect
consumers and subcontractors, material suppliers, and others who
suffer loss as a result of a contractor's misconduct. Existing
law provides that any amount of the CLB in excess of $7,500 will
be exclusively for the benefit of homeowners damaged as a result
of a violation of the Law. Therefore, under the current $12,500
CLB requirement, material suppliers can recover up to $7,500 and
the amount available for homeowners recover up to $5,000. This
bill reduces the maximum amount material suppliers can recover
up to $4,000, and increases the amount available to homeowners
to $8,500.
According to CSLB, "In both Washington and Oregon, homeowners
have priority over all non-homeowner claimants. Non-homeowner
claimants are only entitled to whatever remains after homeowner
claims have been satisfied. In addition all payments to
non-homeowners are limited to a combined total of $3,000 from a
$15,000 bond in Oregon. In Washington, the limitation is $6,000
from the $12,000 bond."
Current law requires contractors to pay for services or
materials rendered in connection with a construction project. A
contractor's licensure is contingent upon the securement of a
CLB worth $12,500 in the event of suretyship, or when the
contractor becomes liable for claims resulting from damages as a
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result of violating the Law, including a contractor's failure to
material suppliers for materials or services rendered. It is
common for services and materials in the construction industry
to be provided on credit because of limited cash flow during
construction projects. To apply for a CLB, contractors need to
provide their personal credit history, credit rating, and
financial statements to an admitted surety because of the
financial liability involved. A contractor's failure to pay for
services rendered or complete a project can result in a material
supplier or homeowner filing a claim against a CLB. The
contractor's surety reviews the filed claims, and if they are
legitimate, will pay a prorated claim amount to the claimant.
Claim amounts are awarded on a first-come, first-serve basis.
Once the $12,500 on the CLB has been exhausted, the next
recourse for a claimant is to place a lien against the home
owner's property (which clouds the title) as leverage for
payment. The California Constitution expressly states:
"Mechanics, persons furnishing materials, artisans, and laborers
of every class, shall have a lien upon the property upon which
they have bestowed labor or furnished material for the value of
such labor done and material furnished?" if they have not been
compensated.
In addition to CLB claims and liens, a material supplier can
also issue a complaint with CSLB for non-payment of services,
and CSLB may investigate and proceed with appropriate
disciplinary action.
Increasing the amount reserved for consumers to recover against
a CLB from $5,000 to $8,500 naturally benefits a consumer. Yet,
if a surety only awards legitimate claim amounts filed against a
CLB, reducing the maximum recovery amount a material supplier
can recover from $7,500 to $4,000 may increase the number of
mechanic's liens a material supplier places on a homeowner's
property and negatively impact a consumer. For example, a claim
for money owed for materials on home improvement project limited
in scope, such as a roofing project, may cost approximately
$5,000 in materials, and may be resolved by placing a lien on a
homeowner's property.
Support . According to the sponsor, American Contractors
Indemnity Corporation (ACIC), "While the legislative intent of
the CLB is to protect the consumer first and foremost, ACIC is
now paying approximately 60% of the claims filed against their
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clients' CLBs to material or equipment suppliers?. Clearly,
this problem directly translates into the fact that suppliers
appear to be providing supplies or equipment without
scrutinizing the contractor or subcontractor to ensure that he
has the wherewithal to pay for the material or equipment they've
ordered for the job in the first place! Adding injury to insult
to this problem is the fact that if the cost of the supplier's
claim exceeds the maximum $7,500 that is paid out on the CLB,
the supplier simply files a mechanic's lien for the remaining
amount against the consumer! ACIC proposes to cap the amount
that a material or equipment supplier can obtain from a CLB from
the current $7,500 down to $4,000. It is hoped that that the
reduction in the amount will force suppliers to start
scrutinizing contractors more thoroughly."
Oppose . The opponents contend that "capping the amount that a
material or equipment supplier is allowed to recover from the
contractor through their CLB at $4,000, you are placing all
remaining responsibility for payment on overdue and unpaid
materials, supplies and equipment on the property owner
(consumer), even though the contractor may have been paid by the
consumer for those items. The state constitution provides that
anyone that provides goods, materials, or labor to a work of
improvement is entitled to payment under state mechanics' lien
laws. The fear of consumers being put in a position of having
to pay twice for materials and supplies is the primary reason we
raised the CLB amount to $12,500 and provided [within that
figure] a set-aside of $5,000 for the consumer. By design, the
CLB is to be used prior to a lien action so suppliers can be
compensated without having to file a lien. Lowering the amount
[consumers] can claim on the CLB will just increase lien
actions. In addition, taking delivery or possession of
materials and supplies and not paying the merchant that provided
them is effectively stealing."
Previous legislation . SB 1919 (Figueroa), Chapter 1123,
Statutes of 2002, increases the amount of the CLB that
contractors must file with the CSLB from $7,500 to $10,000 as of
January 1, 2004, and $12,500 as of January 1, 2007. This bill
also specifies that any amount of the CLB in excess of $7,500
will be exclusively for the benefit of homeowners damaged as a
result of a violation of the Law.
REGISTERED SUPPORT / OPPOSITION :
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Support
American Contractors Indemnity Corporation (sponsor)
Contractors State License Board
Opposition
Air-Conditioning & Refrigeration Contractors Association
Air Conditioning Sheet Metal Association
Building Industry Credit Association
California Legislative Conference of the Plumbing, Heating and
Piping Industry
California State Pipe Trades Council
National Electrical Contractors Association, California Chapters
State Association of Electrical Workers
State Building and Construction Trades Council
Western State Council of Sheet Metal Workers
Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916)
319-3301