The Surety is often confronted with bond claims, where a license bond is in effect and where the principal did not use its license. Typically, these claims fall into three categories:
- The license was not yet in effect, was never in effect or was suspended or revoked;
- The principal operated out-of-state, where the license was not in effect; or
- The principal engaged in deals or acts where the license was not required or involved.
This article will address each category and will provide guidelines on how to handle these claims.
1. The license was not yet in effect, was never in effect or was suspended or revoked.
There are situations where a surety issues a license bond, and where that bond is submitted as part of an application package to the state agency which issues the license. The state takes its time in issuing the license or never issues it, and the principal operates its business without a license in the meantime. A bond claim arises, and the surety is confronted with this dilemma. More often, a bond remains in effect after a license is revoked or suspended. On the one hand, working without a license is a violation of the licensing statute and in many cases even a criminal offense. As such, a claim should be covered by the bond, or should it? The state courts, which have dealt with this issue, have held that the bond goes with the license, and that therefore the bond is effective only when the license is in effect.
The following cases support that proposition:
EBY v. U.S. Fidelity & Guarantee Co., 225 S.W. 2d $57 (Tex. App., 1949): A produce wholesaler sold produce to Massey, a produce seller. Massey had applied for a license within the State of Texas and had submitted a license bond with the application. The State never issued the license, yet plaintiff made a claim against the bond. The Court rejected the claim, holding:
In our opinion the trial court was correct in so holding. The statute *459 requires and contemplates that a bond be tendered with the application for license. This tender of a satisfactory bond is a prerequisite to the granting of a license. Asa S. Agar, Inc., v. Texas Underwriters, Tex.Civ.App. 129 S.W.2d 374. This bond is one provided for by statute, and it was not contemplated that said bond should become effective until a license had been issued. In view of the applicable statutes, it cannot be said that the bonding company by furnishing a bond to accompany the application for license in accordance with the statute intended to guarantee performance on the part of a non-licensed buyer of agricultural products operating in violation of the two licensing acts here involved.
A Florida Appeals Court reached the same result in Gulf American Fire & Cas. Co. v. Davis, 172 So.2d 636 (Fla. App,, 1965). In Brown Wholesale Electric Co. v. Merchants Mutual Bonding Co., 713 P.2d 291 (AZ. App., 1984), the Arizona Appeals Court made this sweeping statement:
A contractor’s license is created by statute and a statutory surety bond is coterminous with the license. See United States Fidelity and Guaranty Co. v. Bross, 118 Ariz. 599, 578 P.2d 1028 (App.1978). Indeed, a contractor’s license bond cannot exist without an accompanying contractor’s license. See Watson v. Welton, 115 Ariz. 76, 563 P.2d 331 (App.1977).
In Timmerman v. Hartford Acc. & Indemnity. Co., 220 N.W. 752 (Mich., 1928), the plaintiffs obtained shares of stock from an unlicensed broker, who had, however, gotten a license bond. The Michigan Supreme Court rejected plaintiffs’ clam against the bond, holding that the bond went with the license and was never approved by the state.
The same principle, namely that the license bond goes with the license, should apply in cases where a license has been revoked and where the principal continues to work nevertheless. Where a contractor’s license has been suspended and the contractor continues to work, the picture is less clear. First, the state’s contractor’s license board may let the contractor complete a project even after a license is suspended, and second, courts will evaluate whether the licensee knew of the suspension and was in substantial compliance with the licensing statute. See, a. o., ICF Kaiser Engineers, Inc. v. Superior Court, 75 Cal. App. 4th 226 (Cal. App., 2000). In that case, a claimant may well be allowed to assert a successful claim.
2. The principal operated out-of-state, where the license was not in effect.
As the bond goes with the license, claims against a license bond for out-of-state acts of the principal should be disallowed. However, the case law on this issue is divided. The main argument against bond coverage is this: License bond are typically required by statute and their coverage is also delineated by statute. “It is a “longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’ ” EEOC v. Arabian American Oil Co., 499 U.S. 244, 248, 111 S.Ct. 1227, 113 L.Ed.2d 274 (Aramco). The same principle applies to state stattutes. When a statute gives no clear indication of an extraterritorial application, it has none.” (Emphasis added) Ibid., p. 248 See also, Nevares v. M.L.S, 245 P.3d 719 (Utah, 2015).
While we have not found any cases dealing with claims against a contractor’s license bond, where the contractor worked out of state, other state court have done so in regard to other license bond claims, for example in Ore-Ida Potato Products, Inc. v. United Pacific Insurance Company, 392 P.2d 191 (Idaho, 1964). In Ore-Ida, a potato farmer asserted a claim against a wholesale dealer’s Idaho surety bond, when the dealer failed to pay for two transactions which had occurred between the parties in Oregon. The bond had been required by the Idaho Commissioner of Agriculture. On appeal, the farmer argued that certain phrases of the Idaho statute requiring the bond implied that the statute had extraterritorial effect and therefore applied to the Oregon transactions. The Idaho Supreme Court rejected that argument and held:
“Appellant cannot be permitted the extraterritorial interpretation of I.C. Title 22, ch.13, which it seeks. The bond furnished by a produce dealer under the Act must be measured by the law of Idaho under which it was written, and particularly I.C. § 22–1304. Statutes are intended to apply and be confined in their operation to persons, property and rights which are within the territorial jurisdiction of the law-making power. The Act does not expressly provide for extraterritorial application. In the absence of any extraterritorial phraseology contained in such Act, it cannot be construed to have an extraterritorial effect, on the theory that the legislature so intended. (Emphasis added)”
The other cases involved claims against automobile dealer license bonds. Here, the state courts are split on the issue of the extraterritorial application of the statutes requiring these bonds. In line with the basic presumption against extraterritoriality as delineated above, the more reasoned cases are the ones rejecting such claims. For example, the Supreme Court of Iowa rejected the bond claim of a nonresident purchaser who suffered damages as a result of a casual out-of-state sale by an Iowa licensed automobile dealer. The court noted the general rule against the extraterritorial effect of a statute “unless the intention to have a statute operate beyond the limits of the state or country is clearly expressed or indicated by its language, purpose, subject matter or history”, and cited the Ore-Ida case, among others, in rejecting the plaintiff’s bond claim. State Surety Company v. Lensing, 249 N.W.2d 608, 611 (1977) Similarly, the Colorado Court of Appeal rejected the claim of an out-of-state auto auction company against a Colorado motor vehicle dealer’s Colorado license bond, where the alleged fraudulent acts of the dealer occurred outside of Colorado. The court noted that if the fraud had occurred in Colorado, the bond would have covered the claim. However, because the fraudulent acts occurred outside the state, the bond did not cover it. The court cited the Ore Ida case in support of its finding that unless a statute specifically provides for extraterritoriality, it does not have such an effect.
The courts, which have allowed claims against motor vehicle dealer bonds, have done so for different reasons, and did either not address extraterritoriality or distinguished the case from the basic rule against extraterritoriality. A typical case for that position is Metro Milwaukee Auto Auction v. Coulson, 604 N.W.2d 111 (Minn. App. 2000) where the court noted that the dealer committed several acts inside Minnesota to defraud the Wisconsin auctioneer.
3. The principal engaged in deals or acts where the license was not required or involved.
Often, the bond principals engages in acts and deals without using their license, and bond claims are nevertheless asserted. A California court of appeals dealt with this issue in Brown v. Surety Company of the Pacific, 122 Cal.App.3d 614 (1981). Brown, who had made a construction loan to a contractor, sued the contractor and its license surety with allegations of fraud and breach of contract because of the contractor’s failure to repay the loan. The contractor, however, did not work on the project for which the loan was given. The court noted that on appeal “the critical issue posed is whether a contractor’s license bond covers any and all misdeeds of a person who also happens to be licensed as a contractor.” In denying the claim, the court found that the contractor was not working as a contractor on the project and was not using its license, and that therefore the claim against its license bond was improper.
In Great American Mortgage Co., Inc. v. Statewide Insur. Co., 938 P.2d 1124 (Az. App., 1997), former Utah employees of an Arizona mortgage banking corporation tied to enforce an award of past wages they had obtained from the Utah Industrial Commission against an Arizona license bond of their former employer. The Arizona court rejected their bond claim, holding that they were not in the category of claimants to be protected by the statute. According to the applicable statute, the bond was “payable to any person injured by the wrongful act, default, fraud or misrepresentation of the licensee and to this state for the benefit of any such person injured.” The “person” to be protected was a customer of the mortgage banker, not an employee. The court elaborated as follows:
“Similarly, if we were to interpret A.R.S. section 6-947(M) as Employees propose, all creditors of a mortgage banker would have recourse against the license bond. This would include, for example, a seller of office supplies or a provider of telephone service, and would distort the class of persons that the Legislature intended to protect by requiring a mortgage banker license bond, i.e., those persons wrongfully injured by the licensee’s mortgage banking activities. Employees asserting their rights of employment simply do not fall within this protected class.
Moreover, exposing the license bond to such diverse claims would frustrate, rather than serve, the Legislature’s intent of protecting the public. For example, an employee likely would be the first to realize the mortgage banker’s financial difficulties and, by quickly filing an action, could exhaust the license bond before injured borrowers could act. This result would be particularly inequitable if the unpaid employee was partly responsible for the mortgage banker’s financial difficulties. In any event, it would diminish the protection afforded the public by the Legislature, which would not accomplish our **1128 *127 duty to construe, where possible, remedial statutes liberally in favor of the class intended to be protected. See Bogue v. Better-Bilt Aluminum Co., 179 Ariz. 22, 32, 875 P.2d 1327, 1337 (App.1994).”
SUMMARY: The general rule is that license and license bond are inseparable, and that bond claims in cases where the principals did not use their license or did not have a valid license should be rejected. While there are some exceptions to this rule, they do not invalidate its general applicability.