by Bob Incollingo
Promotional emails have been flying, all about the new compliance bond requirement for New Jersey home improvement contractors. So what is a compliance bond, and why now?
First, a reminder. The new compliance bond requirement has nothing to do with the existing liability insurance requirement for contractor business registration.
Second, some vocabulary. A bond is a three-way contract between a bonding company, or surety, who guarantees that someone (in this case, a contractor business) will fulfill some obligation to a third party (in this case, a consumer). If the contractor doesn't fulfill its obligations, the surety is on the hook by the terms of the bond to see that the obligations are performed and that valid consumer claims are paid up to the full bond amount, which the contractor must then reimburse in full.
When a home improvement contractor and a consumer sign an agreement, they owe one another duties arising out of their contract, but moreover at that point, the contractor then owes its customer duties arising out of the law.
A surety can guarantee a contractor's duties under its contract, which is why we have performance bonds and payment bonds and completion bonds and maintenance bonds, more commonly seen in commercial and public construction. The fee to undertake this guarantee is called a premium, and bond premiums are how bonding companies make their money.
A bonding company can guarantee a contractor's duties under the law, as well. A compliance bond is that kind of a guarantee.
Compliance bonds are a new requirement for registration and renewal of registration as a New Jersey home improvement contractor business. This why you are getting those emails. Bonding companies are also calling this new compliance bond a “home improvement contractor bond” to distinguish it from similar contractor license bonds already applicable to plumbing, electrical and HVACR contractors, and others.
New Jersey home improvement contractor registrations must be renewed by March 31 of each year, and renewal applications became available in January 2025. This is why you are getting those emails now. Take a look at the flyer from the Division of Consumer Affairs found online. If you haven't previously seen it, it may help your understanding.
Home improvement has been a legally regulated business for years, and the duties owed by a contractor to a consumer span a number of State and Federal statutes and regulations. The New Jersey Home Improvement Practices regulations issued by the Division of Consumer Affairs in the Department of Law and Public Safety may be the best known example, governing the sale and performance of residential construction outside of new home building. Almost always, a contractor's violation of one of these consumer laws and regulations automatically constitutes consumer fraud, entitling the aggrieved consumer to three times any loss suffered as a result, as well as an award of the costs and legal fees spent to enforce the claim.
On January 8, 2024, Governor Murphy signed into law P.L. 2023, c. 237, which, among other things amended the Contractors' Business Registration Act (formerly the Contractor's Registration Act"), N.J.S.A. 56:8-136 et seq., and created the "Home Improvement and Home Elevation Contractor Licensing Act," N.J.S.A. 45:5AAA-1 et seq. The new "Contractors' Business Registration Act" updated current law that oversees the registration of home improvement and home elevation contractors' businesses. The new law distinguishes between a “contractor business” that performs home improvement or home elevation services and must be registered, and an individual “contractor” who must be licensed in keeping with certain provisions of the new law. Generally, each contractor business will need to employ at least one licensed home improvement or licensed home elevation contractor.
The new law amends N.J.S.A. 56:8-142, and now provides in relevant part:.
e. Every contractor business that is engaged in home improvement or home elevation services shall maintain, in effect during the entire period of registration:
(1) a compliance bond issued by one or more sureties authorized to transact business in this State;
(2) an irrevocable letter of credit issued by a bank; or
(3) securities, moneys or other security acceptable to the division to fulfill the requirements of this section.
Compliance bonds vary in size. The full bond amount, being the most amount of money a bonding company can become obligated to pay out in the event of a successful claim against the contractor business, is called the penal sum or principal sum of the bond. The principal sum of a compliance bond is tied by the new law to the price of the biggest contract the business has signed in the previous 12 months:
f. The principal sum of the compliance bond, letter of credit, or securities, moneys or other security shall be a minimum of:
(1) $50,000 for the performance of services pursuant to a contract valued at more than $120,000 or for the performance of services, in the previous 12 months, for contracts valued at a minimum of $750,000;
(2) $25,000 for the performance of services pursuant to a contract valued between $10,000 and $120,000 or for the performance of services, in the previous 12 months, for contracts valued between $150,000 and $750,000; and
(3) $10,000 for the performance of services pursuant to a contract valued at less than $10,000 or for the performance of services, in the previous 12 months, for contracts valued less than $150,000.
The premium charged by a surety for a compliance bond will tie directly to size of the bond (the penal sum or principal sum). Moreover, the compliance bond must be kept in good force, and renewed to the correct updated limit if the surety has to pay out on a bond claim for violation of the new law:
g. The contractor business shall, from time to time, to the extent that claims are paid, promptly replenish the amount of the compliance bond, letter of credit, securities, moneys or other security maintained pursuant to paragraphs (1) through (3) of subsection f. of this section.
h. The compliance bond, letter of credit, or securities, moneys, or other security shall cover penalties assessed by the division for violations of P.L.2004, c.16 (C.56:8-136 et seq.). (the new "Contractors' Business Registration Act.")
The updated Instructions for Registration as a Home Improvement Contractor Business require the registrant to:
4. Provide proof that you have secured and maintain "additional security," which must be in the form: 1) a compliance bond issued by one or more sureties authorized to transact business in this State; 2) an irrevocable letter of credit issued by a bank; or 3) securities, moneys, or other security. If your additional security is in the form of a bank check, the check must be mailed with the application.
Unless a home improvement contractor business can post other security such as a letter of credit from a bank, no registration is possible unless it has bought a compliance bond by which some surety will guarantee its obedience to the new statutes as well as to the related administrative regulations which have yet to be issued by the future New Jersey State Board of Home Improvement and Home Elevation Contractors. At the time of writing this article there are only outdated administrative regulations because no oversight board has yet convened to develop and publish new ones, and effective dates inside the new law which depend on their issuance are uncertain. The deadline to appoint members to the Board was last July 1st, and the process appears to have stalled. Good information on the timing of all this is scarce, since there has been no meeting of the new Board.
Nevertheless, we are seeing all around us on the internet, sureties pitching compliance bonds. Since existing registrations will expire on March 31, 2025, and successful new registration presupposes that the registrant has a compliance bond, home improvement contractor businesses are under a present deadline to get a bond or other security. I'm not sure that all of this is workable at the present time, for a significant number of registrants.
One reason it may not be workable is that the premium charged by a surety for a compliance bond will not only tie directly to the principal sum of the bond, but also to the credit rating of the contractor business and/or its associated licensed contractor. A contractor business with bankruptcy or other instances of poor credit history, or in the credit history of its individual licensee may find it difficult if not impossible to obtain affordable bonding. In order to fulfill the requirements of registration under the new law, such contractor businesses will be thrown back on securing an irrevocable letter of credit issued by a bank (meeting similar credit scrutiny, which may boil back down to posting cash collateral), or negotiating agreement on other acceptable security with the Division of Consumer Affairs.
If the last paragraph describes you or your business, you probably want professional help working with the surety or the bank or the Government. I invite your call for an appointment.
Bob Incollingo is a dedicated South Jersey construction attorney who litigates coverage disputes and other cases overlaid by contractual risk transfer and insurance issues. He has been certified as a Construction Risk and Insurance Specialist (CRIS) through the International Risk Management Institute, Inc. (IRMI). This insurance designation recognizes specialized expertise in construction insurance, and demonstrates one’s commitment to the construction industry through an on-going continuing education component focusing on construction risk and insurance.
