License Bond: Scope, Proration, and Cancellation
The City of Marlow requires every licensed plumbing contractor to post a $25,000 license bond. The bond's condition is that the principal 'shall comply with the city's plumbing code and shall not engage in unlicensed or fraudulent contracting.' Marlow Plumbing posted the bond; in October the city revoked its license after an inspector found unpermitted gas-line work. Four homeowners then filed claims: (1) $18,000 for a gas leak the inspector attributed to Marlow's code violation; (2) $12,000 for a bathroom remodel abandoned mid-job; (3) $9,000 for a deposit on a job never started; (4) $40,000 for cracked tile caused by poor workmanship. Marlow also owes its supplier $15,000. Total claims against the bond exceed $25,000. The bond was cancelled effective December 31 for nonpayment of premium; the city gave the required 30-day notice.
1. Which claims fall within the bond's coverage, and which do not?
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The bond covers only the penal sum and only the conduct described in its condition: code compliance and no unlicensed or fraudulent contracting.
- $18,000 gas leak - covered. The inspector tied it to unpermitted, code-violating work, which is the core risk the bond addresses.
- $12,000 abandoned remodel - likely not covered. Abandonment is breach of contract, not a code violation, unless the ordinance makes abandonment a licensing violation.
- $9,000 deposit on a job never started - covered only if it qualifies as 'fraudulent contracting' under the ordinance and fraud is proven. If the contractor intended to perform but failed, it is breach of contract.
- $40,000 cracked tile - likely not covered. Poor workmanship is not automatically a code violation; without a code or ordinance violation, the bond is not a warranty.
- $15,000 supplier debt - not covered. The bond runs to the city and the public, not to trade creditors, absent express language.
Do not treat this bond as general liability insurance.
2. If the covered claims exceed the penal sum, how should the surety distribute the $25,000?
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The penal sum is a single ceiling, not $25,000 per claimant.
Assume the $18,000 and $9,000 claims are both valid. Covered claims total $27,000 against $25,000. The surety should pay pro rata:
- Gas leak: ($18,000 / $27,000) x $25,000 = $16,667
- Deposit: ($9,000 / $27,000) x $25,000 = $8,333
If the $9,000 fraud claim fails, the $18,000 claimant is paid in full and $7,000 remains, but non-covered claimants cannot reach it. The surety should obtain releases and, if entitlement is disputed, interplead the $25,000.
It should not pay the first claimant in full and then face a second valid claimant. It should also confirm whether the ordinance or bond specifies a claims procedure or a priority scheme; if not, pro rata is the safer course.
3. What effect does the December 31 cancellation have on these claims?
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Cancellation effective December 31 ends coverage for conduct after that date; it does not erase liability for pre-cancellation violations, including the October unpermitted gas work and any earlier fraudulent contracting. The 30-day notice to the city was required and, if properly given, protects the surety against claims for post-cancellation acts.
The city's October revocation may itself be the violation that triggers the bond, but the surety should check whether Marlow was licensed when the work was performed. Unlicensed contracting before revocation is covered; work after revocation is also a violation. The surety should not assume the revocation date is the cutoff for all claims.
Obtain the city's inspection file, the bond and ordinance, and each claimant's notice. Verify that claimants met any ordinance notice requirements, and reserve indemnity rights against Marlow Plumbing and its owner. Cancellation for nonpayment does not give the surety a defense to pre-cancellation conduct.