Question: I have interviewed several remodeling contractors to work on my home. However, none seems to be able to give me a performance bond for the project. Many say they have recently been told by insurance companies that they can no longer write their performance bonds.
Answer: Bonding of small contractors has certainly tightened up quite a bit over the past two years. One of the primary companies writing small- and medium-size bonds was the Fremont Insurance Co., which retired from the marketplace in 1986.
There are only four or five small bonding companies that are willing to write performance bonds on home-improvement and specialty contractors on a regular basis.
One of the reasons for this is that the claims from homeowners on smaller jobs are much higher than from corporations and municipalities that build larger projects.
Another problem that is becoming very difficult for small bonding companies to handle is bad faith. Bonding, unlike insurance, is a financial guarantee by a bonding company that if the contractor does not perform the work, the bonding company will either finish the project or pay out the penalty sum of the bond.
However, there recently has been an increase in the number of bad-faith suits. But the bonding companies' problems are that under the financial guarantees, signed by the contractor, the contractor has a voice in the settlement of the bonding claim.
This can sometimes result in unwarranted bad-faith claims against bonding companies, not only from the claimant, the homeowner, but also from the construction company if it feels than an unwarranted claims has been paid. This "Catch-22" has caused serious problems.
Fontaine is president of the Western Regional Master Builders Assn. and a director of the American Building Contractors Assn. He will answer questions concerning home improvements. Phone 213/653-4084 or write him at 6404 Wilshire Blvd., Suite 850, Los Angeles 90048-5510.