BILL ANALYSIS Ó
AB 1236
Page 1
Date of Hearing: April 16, 2013
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Richard S. Gordon, Chair
AB 1236 (Hagman) - As Amended: April 8, 2013
SUBJECT : Contactors: limited liability companies.
SUMMARY : Authorizes a licensed contractor organized as a
limited liability company (LLC) to obtain limited liability
insurance from an eligible surplus line insurer licensed in
another state, as specified.
EXISTING LAW :
1)Provides for the licensure and regulation of contractors by
the Contractors' State License Board (CSLB) under the
Contractors State License Law (CSLL). (Business and
Professions Code [BPC] 7000 et seq.)
2)Requires a licensed contractor LLC with up to five employees
to maintain at least a $1 million limited liability insurance
policy issued by a state licensed insurer, and further
requires an additional $100,000 of insurance per additional
employee not to exceed $5 million total. (BPC Section 7071.19)
3)Allows a surplus line broker to solicit and place insurance
with non-admitted insurers only if that insurance cannot be
procured from insurers admitted for that particular class of
insurance, upon meeting specified conditions. (Insurance Code
[INS] Section 1763)
4)Requires a non-admitted insurer to maintain a minimum of $45
million in capital and surplus, unless otherwise exempted.
(INS 1765.1, 1765.2)
5)Establishes the Beverly-Killea Limited Liability Company Act
(LLC Act), to provide for LLCs to organize and conduct
business in California, and allows foreign LLCs (any LLC
organized outside of California) to register to conduct
business in the state. The LLC Act prohibits domestic and
foreign LLCs from rendering professional services in
California. (Corporations Code [Corp] Section 17375)
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6)Defines "professional services" as "any type of professional
services which may be lawfully rendered only pursuant to a
license, certification, or registration authorized by the BPC,
the Chiropractic Act, or the Osteopathic Act." (Corp 13401)
FISCAL EFFECT : None. This bill is keyed non-fiscal by the
Legislative Counsel.
COMMENTS :
1)Purpose of this bill . Existing law requires a contractor
organized as a LLC to procure limited liability insurance from
a state-admitted insurer that is licensed and regulated by the
California Department of Insurance (CDI). This bill would
authorize a contractor LLC to also acquire limited liability
insurance from a non-admitted surplus line carrier (one that
offers higher-risk insurance to clients unable to obtain
coverage from a state-admitted insurer) that is located and
licensed in a different state, and subject to federal
regulation and limited California regulation. Under current
law, if a contractor who wishes to be organized as a LLC
cannot obtain limited liability insurance from an admitted
insurer, the contractor is ineligible to become a LLC. The
aim of this bill is to allow contractors who cannot obtain
limited liability insurance from a state-admitted insurer, but
can obtain it from a non-admitted surplus line insurer, to
become a LLC. This bill is sponsored by the Association of
California Insurance Companies.
2)Author's Statement . According to the author's office, "SB 392
(Florez), Chapter 698, Statutes of 2010, granted LLC status to
contractors. One of the provisions within the bill stated
that the [insurance] carrier had to be a California admitted
carrier and not a 'surplus line' carrier. Therefore, the bill
only allowed contractors to purchase insurance from the
admitted market. However, much of this coverage is only sold
on the surplus line market and there are many contractors in
California who have [generality] liability [insurance with] a
surplus line carrier. AB 1236 would place into conformity
this provision so that [contractors] do not have to change
carriers should they apply for LLC status."
3)Contractor LLC insurance requirements . SB 392 authorized
licensed contractors to be organized as LLCs and offered
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owners and shareholders flexibility on management, tax
deductions, and business transfers. General contractors are
allowed to organize as sole proprietorships, general
partnerships, limited partnerships, C-Corporations, or
S-Corporations.
Current law also requires contractors to maintain several
types of financial security policies, including surety bonds
and workers' compensation insurance as a condition of
licensure. These financial security policies provide
protection for property owners, employees, or individuals who
have been financially damaged by a contractor's actions and
seek recompense. Many general and specialty contractors
voluntarily decide to purchase additional general liability
coverage to indemnify themselves against potential liability
that may arise from a construction project they work on, even
though they are not statutorily required to do so.
Since contractors are not statutorily required to obtain
general liability coverage, they can procure that insurance
through both the admitted and non-admitted insurance market.
However, a contractor can only procure insurance through the
non-admitted market if it cannot first be procured through the
admitted market. According to information provided by
proponents, over 68,000 licensed contractors have general
liability coverage through the non-admitted market. In
addition, CDI allows certain types of insurance coverage -
such as for the construction of new tract homes and
condominiums - to be procured through the non-admitted surplus
line market without first going through the admitted market
after CDI finds after a public hearing that there is not an
adequate market among admitted insurers.
A contractor LLC is currently required to maintain a $100,000
surety bond and a minimum $1 million limited liability
insurance policy for up to five employees, with an additional
$100,000 of limited liability insurance coverage per
additional employee not to exceed a total of $5 million.
Existing law requires that this limited liability insurance
coverage be procured by an admitted insurer.
Proponents argue that this bill would allow a contractor who
already has general liability insurance coverage through a
non-admitted surplus line carrier and wishes to be organized
as a LLC, to conveniently use the same non-admitted surplus
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line carrier to cover his or her limited liability insurance
requirements. Proponents also contend that this bill would
allow more contractors, who cannot obtain limited liability
insurance from an admitted carrier, to be structured as LLCs
if they can obtain insurance from a non-admitted surplus line
carrier.
It is unclear how many contractor LLC applicants were denied
or did not seek licensure as a result of being unable to meet
the limited liability insurance requirements. Since January
1, 2011 when contractors were allowed to organize as LLCs, the
CSLB has received 883 applications for a contractor LLC
license and issued 234 such licenses to applicants who hold
limited liability insurance policies issued by an admitted
insurer. The CSLB was unaware of any applicant who could not
obtain the required insurance.
4)Understanding insurance terminology . An "admitted" insurer is
one that is licensed and regulated by CDI. This makes certain
that the insurer is financially sound and that their insurance
policy forms and rates are regulated. In addition, admitted
insurers contribute to a guaranty fund that is used to pay
claims should an insurer fail or go bankrupt.
Conversely, "surplus line" insurers are insurers that are not
admitted by the state of California, and therefore not
licensed or regulated by CDI (although they would be licensed
by a different state and subject to federal regulations). As
a result, surplus-line insurers are able to charge higher
rates to provide insurance that admitted insurers might view
as high-risk. According to the National Conference of State
Legislators, this may include commercial general liability
insurance, fire insurance, mobile home policies, automobile
physical damage coverage, and medical malpractice insurance.
An "eligible surplus line insurer", as used in this bill, is
an insurer who has met the standards set forth in the
California Insurance Code and the federal Nonadmitted and
Reinsurance Reform Act of 2010, uses a surplus line broker
licensed in California to sell surplus line insurance, and
holds a minimum reserve of $45 million in capital and surplus.
This reserve requirement, which has been recently increased
by the state, serves as additional protection for individuals
who wish to place an insurance policy with a non-admitted
insurer.
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However, federal law places restrictions on the ability of a
state to regulate the sale of surplus line insurance. For
example, California cannot impose eligibility requirements on
non-admitted insurers and cannot prohibit the sale of
non-admitted surplus line insurance. In addition, CDI does
not pre-review or approve capitalization levels or assets, nor
perform officer and director background reviews for an
eligible surplus line carrier. Eligible surplus line insurers
do not need to file any documents with the CDI.
5)Fewer options for consumers if surplus line go bankrupt . CDI
handles professional and consumer complaints regarding
non-admitted surplus line carriers and licensed surplus line
brokers. However, when complaints relate to underwriting
issues, such as eligibility of coverage, types of coverage and
level of coverage, CDI may work voluntarily with the involved
parties to resolve those issues, even though CDI may not
necessarily have jurisdiction. However, if a surplus line
insurer goes bankrupt, the insured and the claimants may need
to seek recompense within the surplus line insurers' domiciled
state, although if the insurer becomes insolvent, it may be
difficult to receive financial compensation.
6)Questions for the Committee . This bill attempts to provide
greater access to liability coverage to contractor LLCs that
might otherwise have limited options to choose from.
Nevertheless, the Committee may wish to consider the following
issues raised by this bill:
A contractor's insurance premiums and rates vary based on a
contractor's credit history, work performance, and past
violations. As mentioned earlier, 234 contractor LLCs are
already insured through an admitted insurer, which suggests
that it is indeed possible to purchase such supplemental
coverage. Accordingly, the extent of the problem of a
contractor LLC applicant being unable to purchase necessary
insurance coverage remains unclear. It may be that such
coverage is simply more expensive, which itself may be a
barrier.
Also, if a contractor is denied coverage by an admitted insurer
and can only obtain it through the non-admitted insurance
market, it raises the question as to whether the denial was
caused by credit history, prior performance, or another
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reason. Of course, if a surplus line carrier is willing to
assume the risk of insuring a contractor LLC for limited
liability, then the price will reflect that risk.
The Committee may wish to ask the following questions of the
author:
a) How might consumers be affected by allowing contractors
to obtain this insurance from out-of-state insurers who are
not regulated by CDI?
b) Would consumers have adequate financial protections in
place if a contractor LLC with limited liability were
permitted to purchase this liability insurance from an
out-of-state insurer that is not backed by a guaranty
association?
7)Arguments in support . According to the sponsor, the
Association of California Insurance Companies, "Several
businesses, including contractors, may not have access to
available insurance coverage with licensed insurers, also
referred [to] as the admitted market? Where coverage is found
to have become generally unavailable, such insurance may be
procured through a licensed surplus line broker and placed
with an eligible surplus line insurer...
"While not subject to the direct regulation of California, the
surplus line insurer must maintain a license to write the type
of insurance to be written in its state of domicile, maintain
minimum capital and surplus of $45 million to support such
business, and be subject to the financial solvency regulations
of its domiciliary jurisdiction, and, in the case of alien
insurers, financial review by the International Insurers
Department of the National Association of Insurance
Commissioners."
According to the California Insurance Wholesalers Association
and the Independent Insurance Agents and Brokers of
California, "There are currently close to 68,000 insurance
policies covering licensed contractors in California [that]
are placed with non-admitted insurance companies. This fact
alone reflects the limited market for such coverage from
California admitted insurers, which is the reason that
California businesses are authorized to purchase insurance
from non-admitted insurers."
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According to the American International Group, "There [is not]
a similar requirement for other professionals, such as
architects, accounts, insurance agents, and brokers organized
as LLCs to purchase liability coverage from a California
admitted insurer." AB 1236 will "increase access to insurance
for contractor LLCs, increasing choice and competition in the
marketplace. More insurance availability can also have a
positive effect on [insurance] premium pricing."
8)Previous Legislation . SB 392 (Florez), Chapter 698, Statutes
of 2010, allowed licensed contractors to organize their
company under the laws of a LLC.
SB 1225 (Harman), Chapter 114, Statutes of 2008, authorizes
the organization and operation of cemetery authorities as LLCs
as long as they carry liability insurance policies or other
security in the amount of $1 million. SB 1225 prohibits
licensees rendering professional services from having any
ownership in the LLC.
AB 2914 (Leno), Chapter 426, Statutes of 2006, extends the
sunset date on licensed architects' ability to organize as
limited liability partnerships (LLPs) to January 1, 2012, and
increases the minimum liability coverage requirements for
architectural LLPs to $1 million (from $500,000) as of January
1, 2008.
SB 1337 (Correa) of 2008 was similar to SB 392, but lacked the
insurance and/or escrow deposit requirements for the LLC and
its members. SB 1337 bill died in Senate Judiciary Committee.
SB 141 (Beverly), Chapter 57, Statutes of 1995, would have
added numerous categories of state regulated professional
service providers to the types of businesses that could
operate as LLCs. However, opponents of SB 141 and the bill's
sponsor were unable to agree as to whether or not professional
or licensed LLC service providers should carry adequate
insurance to ensure their financial ability to respond to
legal judgments for contract or tort claims. Consequently,
those additional classes of businesses were amended out of SB
141 prior to its enactment.
9)Double-referred . This bill is double-referred, and if passed
by this committee will be referred to Assembly Insurance
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Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Association of California Insurance Companies (sponsor)
American International Group
Associated General Contractors
California Insurance Wholesalers Association
Independent Insurance Agent & Brokers of California
The Surplus Line Association of California
Opposition
None on file.
Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916)
319-3301