DennisBeaverMarch 28, 2010 (Original publish date) • By Dennis Beaver

If you’re about to hire a contractor for a remodel, room addition, or other big ticket job, today’s story has important information which could be a financial lifesaver if things go south. We’ll help you understand one of the most confusing and potentially dangerous aspects of dealing with a contractor.

We’re talking about contractor surety bonds, which come in three different flavors, one of which many homeowners have discovered, is bitter with a capital “B.” If anyone is looking for a cruel joke on the public by the State of California, then the typical Surety Bond is a laugh a minute.

December 2006 nightmare

When San Diego reader “Keith” hired a contractor for extensive home remodeling in December 2006, he knew that contractors had to have a bond, but he did not know “how virtually worthless it could prove to be if things went wrong,” he told You and the Law.

“Shortly after work began, it was clear our contractor was not only incompetent, and a thief, but put our family at risk through construction errors as serious as to make living in the property impossible.”

The San Diego building inspector issued a number of correction notices for critical and dangerous errors. These included misaligned structural beam support, framing errors, improperly notched and cut beams, unplumbed walls and serious plumbing violations — all major building code violations. Left unrepaired, the walls and floors wouldn’t fit together properly, windows and doors wouldn’t open or close correctly, his house would be at risk of collapsing.

The cost to repair damage came to well over $100,000 and added more than 10 months to the remodel.

“But the contractor had a bond and we assumed it would cover the cost of repairs. Were we in for a real surprise! The bond was only for $12,500 — all that was required by the State of California,” he told me, with a look of disbelief, even years after making that discovery.

Three types of bonds

“There are three types of “surety” bonds: (1) The contractor’s licensing bond; (2) performance bonds, and; (3) payment bonds. The differences are enormous,” Glendale based Attorney Kirk S. MacDonald explained when we talked about this confusing subject.

“Performance bonds and payment bonds serve to guarantee completion of the job and payment for labor and material if the contractor abandons the job or is removed for a valid reason.”

“But unless one or both of those bonds is specifically negotiated and paid for, consumers are only covered under the contractor’s licensing bond, which is required to be licensed. In terms of basic, consumer protection, it is the weakest of all bonds, providing minimal protection in a practical sense, as claims can be incredibly time consuming and difficult to successfully establish,” Mr. MacDonald added.

Keith learned the hard way why the licensing bond is almost of no value. That’s because a bonding company might pay if it agrees the contractor violated the California Business and Professions Code. Even if the Contractor’s State License Board concludes there is a violation, the bonding company could dispute it and refuse payment.

He wound up in years of litigation which is only now coming to a conclusion. “I didn’t know a thing about bonds, beyond what I thought I knew. With our major remodel, I should have consulted a construction attorney, and gotten educated. But I trusted the contractor and assumed that California law was there to protect us. Boy, was I wrong,” my poorer — yet wiser San Diego reader stated.

Can you really stop the bad guy?

“We felt a deep obligation to stop this dangerous contractor from hurting anyone else. Clearly, we did not want to be out the money, but it was much more than about money. We felt that once proof of what he had done and failed to do was brought to the attention of the bonding company, they would immediately pay on his bond. We were in for more frustration than we ever could have imagined.”

“Fighting with a bonding company and dealing with poorly trained and uncaring investigative staff at the Contractors State License Board left us angry and tremendously disappointed. While we had the financial resources to bring a crooked contractor to justice, most people do not. I wish that someone had gotten hold of us and said, you will be in for a punishing ride. Don’t go there.”

Next week: The types of bonds you absolutely must have.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.