BILL ANALYSIS Ó
AB 1236
Page 1
Date of Hearing: April 24, 2013
ASSEMBLY COMMITTEE ON INSURANCE
Henry T. Perea, Chair
AB 1236 (Hagman) - As Amended: April 8, 2013
SUBJECT : Contactors: liability insurance: nonadmitted insurers
SUMMARY : Authorizes a licensed contractor organized as a
limited liability company (LLC) to obtain statutorily required
liability insurance from a nonadmitted insurer. Specifically,
this bill:
1)Authorizes a nonadmitted insurer to write the insurance policy
purchased by a contractor organized as an LLC.
2)Requires this insurance to comply with the regulatory
requirements of the Insurance Code that govern placement of
insurance with a nonadmitted insurer.
3)Adds conforming language relating to the documents that
constitute the proof of this insurance.
EXISTING LAW :
1)Provides for the licensing and regulation of contractors by
the Contractors' State License Board (CSLB) under the
Contractors State License Law.
2)Requires a licensed contractor that is organized as an LLC
with up to five employees to maintain at least a $1 million
liability insurance policy issued by an admitted insurer, and
further requires an additional $100,000 of insurance per
additional employee not to exceed $5 million total.
3)Requires, generally, that insurance sold on California risks
be sold by admitted (licensed) insurers, but allows the sale
of nonadmitted insurance through a specially licensed surplus
line broker if that insurance cannot be procured from admitted
insurers.
4)Requires a non-admitted insurer to maintain a minimum of $45
million in capital and surplus, among other regulatory
requirements, unless otherwise exempted, and places primary
responsibility on the surplus line broker to initially
AB 1236
Page 2
ascertain that the insurance is eligible to be "exported" to
the nonadmitted insurer.
FISCAL EFFECT : Unknown.
COMMENTS :
1)Purpose . According to the author, the legislation that
authorized licensed contractors to utilize the LLC form of
business organization -- SB 392 (Florez), Chapter 698,
Statutes of 2010 - unnecessarily limited the bill's liability
insurance requirements to insurance procured from admitted
companies only. However, much of this insurance is available
only from the nonadmitted market. The author notes that there
are many contractors in California that are not LLCs that have
to purchase (nonmandatory) general liability insurance from a
nonadmitted insurer, evidencing the fact that this insurance
is not sufficiently available from admitted insurers.
2)Contractor LLC insurance requirements . Current law 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 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.
According to information provided by proponents, over 68,000
licensed contractors have general liability coverage through
the non-admitted market. In addition, the Department of
Insurance (DOI) allows certain types of insurance coverage -
such as for the construction of new tract homes and
condominiums - to be procured through the non-admitted market
without first searching the admitted market, because DOI has
found after a public hearing that there is not an adequate
market among admitted insurers.
Proponents argue that this bill would allow a contractor who
already has general liability insurance coverage through a
nonadmitted carrier and wishes to be organized as a LLC, to
use the same nonadmitted surplus line carrier to cover his or
her limited liability insurance requirements. Proponents also
AB 1236
Page 3
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.
3)Reduced consumer protection with nonadmitted insurance . The
DOI has a more limited jurisdiction when consumer problems
arise in connection with insurance written by a nonadmitted
insurer. Nonetheless, the insurer is still subject to the
jurisdiction of California courts. However, the most
significant limitation where nonadmitted insurance is involved
is the extent of consumer protection if the insurer becomes
insolvent. In the case of an admitted insurer becoming
insolvent, the California Insurance Guarantee Association
(CIGA) covers most insurance claims. There is no comparable
protection in the case of a nonadmitted insurer becoming
insolvent.
4)Proponents suggest excluding nonadmitted insurance may have
been an oversight . When the LLC form of business organization
was established, and especially since it has been made
available for professional services, concerns have been
expressed that these companies shelter the assets of the
owners from people who may have been harmed by actions of the
LLC. As a result, insurance requirements have been mandated
to ensure that people harmed by the LLC have legitimate
recourse to assets to remedy that harm. Proponents point out
that there is not a similar admitted insurer requirement for
other professionals, such as architects, accountants,
insurance agents and brokers organized as LLCs.
REGISTERED SUPPORT / OPPOSITION :
Support
Association of California Insurance Companies (sponsor)
American International Group
Associated General Contractors
California Insurance Wholesalers Association
AB 1236
Page 4
Independent Insurance Agent & Brokers of California
The Surplus Line Association of California
Opposition
None received
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086