Two Remedies Arizona Homeowners May Overlook: The Contractor's License Bond and the Recovery Fund

When a contractor takes a deposit and stops responding, or finishes a remodel so poorly that it requires fixing before any other work can proceed, the owner's first instinct is to sue the contractor. While this may be a proper course of action, there are other options available to Arizona homeowners who have a dispute with their contractor. A contractor who abandoned a job is often the contractor with no assets. Arizona built two other sources of recovery into the contractor licensing statutes for such circumstances, and many homeowners never use either.

The license bond

Before the Registrar of Contractors issues a license, A.R.S. § 32-1152 requires the applicant to post a surety bond or cash deposit, and the license cannot be renewed unless it stays in force. A general residential contractor posts between $5,000.00 and $15,000.00. A specialty residential contractor posts between $1,000.00 and $7,500.00. The amounts are modest and the surety is a company authorized to transact surety business in Arizona that pays when the contractor cannot. The residential bond is open to claims by the same claimants the Recovery Fund statute describes, discussed below, and by those who furnished labor, materials, or rented equipment on the job. The statute allows the court to award reasonable attorney fees in a judgment against the bond, which is what makes a small bond claim worth pursuing. Note, the surety's total liability for all claims, including attorney fees, is capped at the face amount of the bond. The bond stays subject to claims until its full amount is exhausted, as other claimants may be pursuing it at the same time.

The two year deadline

A suit to collect on the bond may not be commenced after two years following the contractor's act, delivery of goods, or rendering of services on which the suit is based, with fraud claims measured under A.R.S. § 12-543. The two years run from the contractor's conduct, not from the owner's discovery of it. An owner who spends a year negotiating and a year waiting on the Registrar may have lost the ability to collect against the bond without knowing it.

The surety's sixty day notice

A.R.S. § 12-1641 allows a surety, once the right of action has accrued, to serve a written notice requiring the claimant to sue forthwith, and a claimant who fails to sue within sixty days is barred from the bond. The notice may arrive as a form letter, sometimes in the same envelope as a denial of the claim. Note, a grievance alone is not sufficient to collect on a bond if a lawsuit has not been filed, and the statute requires that the lawsuit name both the contractor and the surety. A bond surety will demand a judgment or adjudication. In plain English, the surety will expect a court judgment against the contractor before it pays. An arbitration award qualifies once a court confirms it and enters judgment on it.

Two Arizona decisions govern that surety notice. Prescott National Bank v. Head, 11 Ariz. 213 (1907), holds that a surety's notice served while the validity or amount of the underlying claim is still in dispute is premature, because the right of action has not yet accrued, and McClellan Mortgage Co. v. Storey, 146 Ariz. 185 (App. 1985), holds that the surety's statutory defense can be waived by contract. Whether either decision applies to a particular owner depends on what the surety's notice states, when it was sent, and what the owner did in the sixty days after receiving it. Ignoring the notice is the one response that reliably sacrifices the bond. Which response fits is a judgment call to make in consultation with Patrick.

The Residential Contractors' Recovery Fund

Residential contractors must either post an additional $200,000.00 bond or participate in the Residential Contractors' Recovery Fund, established by A.R.S. § 32-1132 and administered by the Registrar. Eligibility for the Fund is specific and narrow. Owner-occupants qualify, but investors and owners of rental property generally do not. Certain trusts, limited liability companies, associations, and tenants qualify under conditions the statute spells out. The contractor must have been properly licensed on particular dates, and a contractor who was not may disqualify the owner from the Fund entirely.

Under A.R.S. § 32-1132.01 the maximum award is $30,000.00 per claimant, measured by a statutory definition of actual damages that turns on licensed bids and the unpaid contract balance. A lost deposit with no work performed is recoverable in full with ten percent interest, up to the cap. The Fund does not pay attorney fees or costs except in a contested case appealed to the superior court, and amounts recovered elsewhere, including from a surety bond, are deducted.

Three avenues, one sequence

An owner-occupant with, for example, a $60,000.00 remodel loss, dealing with a general residential contractor who has stopped responding, has three avenues for relief: the contractor, the license bond, and the Recovery Fund. Each has a different clock, a different forum, and a different set of eligibility rules, and taking a step that helps with one can foreclose another. A Registrar complaint is inexpensive and can produce corrective work, but it does not stop the two year bond clock. A lawsuit preserves the bond and does nothing for the Fund until it produces a judgment. The order matters, and it is chosen once, at the start of the dispute, in consultation with Patrick.

Nackley Law represents Arizona property owners in disputes with contractors and builders, including bond claims, Registrar proceedings, and Recovery Fund claims. Contractor disputes are considered on their merits regardless of amount.