Under B&P Code Section 7071.17, what happens to a contractor's bond when a valid claim is paid?
Correct Answer
A) Bond coverage is reduced by the claim amount
When a bond claim is paid, the bond coverage is reduced by that amount, and the contractor must restore the bond to the required minimum amount.
Why This Is the Correct Answer
Under B&P Code Section 7071.17, when a surety pays a valid claim against a contractor's license bond, the bond's coverage is reduced by the amount paid. The contractor is then obligated to restore the bond to the required minimum ($15,000) to maintain license compliance.
Why the Other Options Are Wrong
Option B: Bond premium increases by 50%
The bond premium is set by the surety company based on the contractor's risk profile — it does not automatically increase by a fixed percentage when a claim is paid. Premium adjustments happen at renewal, not as a mechanical statutory consequence.
Option C: Bond remains at full coverage amount
The bond does not remain at full coverage after a claim payment. The surety's aggregate liability is reduced by each payout, which is why the contractor must replenish the bond.
Option D: Bond is automatically cancelled
The bond is not automatically cancelled upon a claim payment. It is reduced, and the contractor has the opportunity (and obligation) to restore it. Automatic cancellation would be an overly harsh outcome not required by the statute.
Memory Technique
Think of a bond as a bucket of water. Each claim scoops water out. You must refill the bucket to stay licensed. The bucket never magically refills on its own.
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