Arizona Residential General Contractors Bond
What is the Purpose of the Arizona Residential and General Contractors Bond?
The Arizona Residential and General Contractors Bond is a license and permit bond that ensures that contractors pay all required taxes and fees, perform work that is up to code and in compliance with the Registrar of Contractors’s standards and pay all laborers and material suppliers. Contractors that fail to adhere to these standards may be liable up to the full bond amount. Additionally, contractors may elect to deposit cash instead of purchasing a surety bond.
The Arizona Residential and General Contractors Bond is required under Arizona Statute 32-1152.
Who Needs the Arizona Residential and General Contractors Bond?
In short - all residential and general contractors conducting business in the state. Arizona Statute 32-1101 defines a contractor as a person who provides one or more of the following construction services either directly or indirectly (supervises others or coordinates with subcontractors):
- Construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any structure or other related development/project
- Connect structures/improvements to utility service lines, metering devices and sewer lines
- Provide mechanical or structural services for any structures/improvements
This definition also includes all subcontractors, specialty contractors, floor covering contractors, hardscape contractors and consultants.
The Arizona Registrar of Contractors mandates that contractors purchase a surety bond as a condition for receiving a contractor license. Arizona Statute 32-1102 classifies contractor licenses as follows:
- General Commercial Building: Applies to contractors that provide construction services for new or existing commercial buildings. General commercial contractors either perform the work themselves or coordinate work to be performed by sub or other contractors.
- General Dual Licensed: Functions the same as a general commercial building license, except this license classification allows general contractors to provide construction services on residential and commercial projects.
- General Engineering: Provides specialized engineering knowledge and skills for non-residential construction projects that include irrigation, drainage, water power, water supply, flood control, inland waterways, harbors, railroads, highways, tunnels, airport runways, sewerage, bridges, earth-moving projects, paving and transmission lines
- General Residential: For general contractors and subcontractors that construct, alter, repair, add to, subtract from, improve, move, wreck or demolish residential structures, including swimming pools located within residential property.
- Specialty Commercial: Provides construction services for parts of commercial projects that require specialized skills related to a specific trade.
- Specialty Residential: Provides construction services for parts of residential projects that require specialized skills related to a specific trade
- Specialty Dual Licensed: Functions the same as the specialty commercial and residential licenses except the contractor can work on residential and commercial projects.
What Do Surety Underwriters Need to Know?
Contractor license bonds generally pose a greater risk to surety companies than other license and permit bond types. This is because claims can arise from multiple aspects of the business, such as payment obligations and quality of work requirements.
The Arizona Registrar of Contractors requires prospective contractors to have multiple years of experience and/or pass a prelicensure exam. These requirements help reduce the likelihood of claims as prospective contractors must be qualified prior to receiving a license. Surety companies may cancel the bond provided that they provide both the contractor and Registrar of Contractors written notice (via certified mail in a sealed envelope with postage fully prepaid for the contractor) 30 days before the cancellation date. However, claims may still be made against the bond for two years from each project’s completion date (three years from the date of discovery for claims relating to fraud).
Arizona Statute 35-1152 states that to file a claim against an Arizona Residential and General Contractors Bond, aggrieved parties must file suit and emerge victorious in a court of law or file a complaint with and obtain a favorable ruling from the Registrar of Contractors. This requirement reduces the surety company’s risk as it increases the resources and effort required to make a claim against the bond.
Contractors that have been subjected to disciplinary proceedings may be required to purchase a separate surety bond up to ten times the original required amount to maintain or reinstate their license. Requirements of this nature are referred to as “adverse selection” and pose significant risk to surety companies as the principal has proven themselves likely to commit actions that constitute valid claims against their bond.
Underwriters should consider the contractor’s creditworthiness, years in business and claims history when determining whether to issue the bond.
What Do Surety Claims Handlers Need to Know?
Arizona Statute 35-1152 states that claims can be made against the Arizona Residential and General Contractors bond for the following reasons:
- Contractor’s failure to pay all required taxes and fees
- The project is not completed as specified in the contract
- Work not up to code
- Fails to meet the Registrar of Contractors’s standards
- Contractor’s failure to pay all laborers and material suppliers
Claims can be made by the Registrar of Contractors, persons who entered into a contract with the contractor and any laborers and material suppliers that provided labor/materials to the contractor. Regardless of the number of valid claims against the bond, the surety company is only liable up to the bond amount. Some surety bonds hold the surety company liable for up to the full bond amount per occurrence (per claim), the Arizona Residential and General Contractors bond does not.
As mentioned before, claims can only be made against these bonds up to two years from the project’s completion (three years from the date of discovery for claims relating to fraud). Surety companies are not obligated to pay out a claim until a judgment has been made against the contractor by either a court of law or the Registrar of Contractors. However, surety companies may choose to pay out a claim before receiving this judgment and will be able to reduce their remaining liability on the bond by the claim amount.
Persons seeking recovery against the contractor’s bond who choose to file a mechanic’s lien must have presented the contractor with a preliminary twenty-day notice for their claim to be valid.
How Does The Arizona Registrar of Contractors Set The Bond Amount?
The limit on the Arizona Residential and General Contractors Bond is set based on the contractor’s license classification and their estimated annual volume of work. The bond’s limits are codified in Arizona Statute 32-1152. The below table illustrates the required bond amounts.
| License Classification | Annual Gross Volume | Bond Amount |
|---|---|---|
| Residential General | Less than $750,000 | $9,000 |
| $750,000 or more | $15,000 | |
| Residential Specialty | Less than $375,000 | $4,250 |
| $375,000 or more | $7,500 | |
| *Commercial General | $150,000 or less | $5,000 |
| $150,001 to $500,000 | $15,000 | |
| $500,001 to $1,000,000 | $25,000 | |
| $1,000,001 to $5,000,000 | $50,000 | |
| $5,000,001 to $10,000,000 | $75,000 | |
| Over $10,000,000 | $100,000 | |
| Commercial Speciality | $150,000 or less | $2,500 |
| $150,001 to $500,000 | $7,000 | |
| $500,001 to $1,000,000 | $17,500 | |
| $1,000,001 to $5,000,000 | $25,000 | |
| $5,000,001 to $10,000,000 | $37,500 | |
| Over $10,000,000 | $50,000 |
Source: Arizona Registrar of Contractors
*Includes general engineering contractors
Contractors that hold multiple license classifications must obtain either a separate surety bond for each classification or one single bond with a limit equal to the sum of the required limits for all individual license classifications the contractor holds.
Contractors holding a residential license classification (including dual contractors) must purchase an additional $200,000 surety bond or pay an assessment into the Registrar’s Residential Recovery Fund.
Can the Arizona Registrar of Contractors Waive the Residential and General Contractors Bond Requirement?
Arizona Statute 32-1152 requires all contractors to provide financial security before receiving a license. Contractors who do not wish to purchase a surety bond may elect to provide a cash deposit equal to the full bond amount.
How Much Does The Arizona Residential and General Contractors Bond Cost?
The Arizona Residential and General Contractors bond costs between 0.5% to 10% of the bond amount based on the qualifications of the applicant.
How is the Arizona Residential and General Contractors Bond Filed?
The Arizona Residential and General Contractors Bond must be filled with the Arizona Registrar of Contractors through their online customer service portal. If the surety company is associated with the Registrar of Contractors’s service portal, they will receive a notification when the contractor submits their license application prompting them to upload the bond on the contractor’s behalf. Contractors that purchased their bonds through a surety company not associated with the portal will have to manually upload their bond themselves, increasing the likelihood of mistakes occurring.
Can the Arizona Residential and General Contractors Bond be Canceled?
Surety companies may cancel the Arizona Residential and General Contractors Bond on the condition that they provide both the contractor and Registrar of Contractors at least 30 days notice prior to the cancellation date. The notice to the contractor must be sent via certified mail in a sealed envelope with the postage prepaid.
Does the Arizona Residential and General Contractors Bond Renew?
The Arizona Residential and General Contractors Bond is continuous and does not expire unless canceled by the surety company. However, the bond principal still needs to pay all required renewal premiums to the surety company.
Do Arizona Contractors Need Any Other Surety Bonds?
In addition to the contractor license bond, contractors that become delinquent on their taxes may be required to obtain an Arizona Contractor Taxpayer bond, which ensures the state will not suffer financial losses of the contractor fails to pay their taxes. Additionally, many commercial contractors will need to obtain bid, performance and payment bonds for each project they undertake. Residential contractors are generally not required to purchase bid, performance and payment bonds.