BILL ANALYSIS Ó
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|Hearing Date:June 10, 2013 |Bill No:AB |
| |1236 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Ted W. Lieu, Chair
Bill No: AB 1236Author:Hagman
As Amended:April 8, 2013 Fiscal:No
SUBJECT: Contractors: limited liability companies.
SUMMARY: Authorizes a contractor licensed as a limited liability
company to obtain statutorily required liability insurance from a
surplus line insurer.
Existing law:
1)Licenses and regulates more than 300,000 contractors under the
Contractors State License Law (Contractors Law) by the Contractors
State License Board (CSLB) within the Department of Consumer Affairs
(DCA). The CSLB is under the direction of the Registrar of
Contractors (Registrar). (Business and Professions Code (BPC) §
7000 et seq.)
2)Authorizes the issuance of a contractor license to an individual
owner, co-partnership, corporation, joint venture, or a limited
liability company (LLC). (BPC § 7065)
3)Requires a licensed contractor organized as an LLC with up to five
employees to maintain at least a $1 million limited liability
insurance policy issued by an admitted (California-licensed)
insurer , and further requires an additional $100,000 of insurance
per additional employee not to exceed $5 million total. (BPC §
7071.19)
4)Requires, generally, that insurance sold on California risks be sold
by admitted (licensed) insurers, but allows the sale of non-admitted
insurance through a specially licensed surplus line broker only if
that insurance cannot be procured from admitted insurers.
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Page 2
(Insurance Code (INS) § 1763)
5)Requires a non-admitted insurer to maintain a minimum of $45 million
in capital and surplus, unless otherwise exempted. (INS §§ 1765.1;
1765.2)
This bill:
1)Authorizes a contractor licensed as an LLC to obtain the required
liability insurance from a surplus line insurer.
2)Specifies that insurance offered by surplus line insurers must comply
with specified insurance procurement requirements of the Insurance
Code.
3)Makes conforming changes relating to the documents that constitute
the proof of liability insurance from a line insurer.
FISCAL EFFECT: This bill has been keyed "nonfiscal" by Legislative
Counsel.
COMMENTS:
1.Purpose. This bill is sponsored by the Association of California
Insurance Companies (Sponsor) to clarify that "insurer or insurers
duly licensed by this state" includes surplus line insurers. This
will ensure surplus line insurers are permitted to write insurance
policies for contractors organized as LLCs, according to the Author.
2.Professional Licenses and LLCs. Limited liability companies are a
relatively new form of business entity for the state. Formation and
operation of such entities in California was authorized in 1994
through the Beverly-Killea Limited Liability Company Act (SB 469,
Chapter 1200, Statutes of 1994). As originally enacted, an
uncodified provision specified that nothing in the Act shall be
construed to permit a domestic or foreign limited liability company
to render professional services, as defined in the Corporations
Code, unless expressly authorized under applicable provisions of the
Business and Professions Code or the Chiropractic Act. This
provision was codified in 1999 (SB 284, Kelley, Chapter 1000,
Statutes of 1999).
Under the Moscone-Knox Professional Corporation Act (Corporations Code
§ 13400 ff.), "professional services" is defined as any type of
professional services that may be lawfully rendered only pursuant to
a license, certification, or registration authorized by the Business
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and Professions Code, the Chiropractic Act, or the Osteopathic Act.
The rationale for the exclusion was apparently that service
providers who harm others by their misconduct, incompetence, or
negligence should not be able to limit their liability by operating
as an LLC and thus become potentially judgment-proof.
Based upon these provisions of law, it has been commonly understood
that the boards and bureaus under the DCA are prohibited from
issuing a license, certification or registration to an entity
organized as an LLC.
More recently, SB 392 (Florez, Chapter, 698, Statutes of 2010)
authorized the CSLB Board to issue a contractor license to an LLC,
and incorporated the LLC business structure into the contractor
license provisions. The bill additionally added paragraph (c) to
Corporations Code Section 17002 to read "(c) Notwithstanding Section
17375, a limited liability company may render services that may be
lawfully rendered only pursuant to a license, certificate, or
registration authorized by the Business and Professions Code if the
applicable provisions of the Business and Professions Code authorize
a limited liability company to hold that license, certificate, or
registration."
Thus, if a licensing law under the BPC specifically authorizes an LLC
to hold a license, then a LLC may obtain a professional license
under that provision.
3.LLC Contractor Requirements. As indicated, SB 392 authorized
licensed contractors to be organized as LLCs and offered 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.
Contractor law requires licensed contractors to maintain several types
of coverage to ensure financial security to protect consumers.
These include 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.
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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.
SB 392 required a contractor licensed as an LLC 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. The law requires that this limited
liability insurance coverage be procured by an admitted insurer.
4.Insurance Terminology. An "admitted" insurer is one that is licensed
and regulated by the California Department of Insurance (DOI). This
makes certain that the insurer is financially sound and that its
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 DOI (although they must be licensed by another 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.
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, 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.
5.Fewer Consumer Options if Surplus Line Becomes Insolvent. The DOI
has a more limited jurisdiction when consumer problems arise in
connection with insurance written by a non-admitted insurer than
with an admitted insurer. DOI handles professional and consumer
complaints regarding non-admitted surplus line carriers and licensed
surplus line brokers. However, if complaints relate to underwriting
issues, such as eligibility of coverage, types of coverage and level
of coverage, DOI may not have jurisdiction but may actually work
voluntarily with the involved parties to resolve any issues.
However, if a surplus line insurer becomes insolvent, the insured
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and any claimant may need to seek recompense within the surplus line
insurers' home state, although it may be difficult to receive any
compensation once an insurer becomes insolvent. In such cases the
insurer would still be subject to the jurisdiction of California
courts.
6. Prior Related Legislation. SB 392 (Florez, Chapter 698, Statutes
of 2010) authorized licensed contractors to be organized as LLCs.
7.Current Related Legislation. SB 261 (Monning) authorizes the CSLB to
take administrative action against a licensed or unlicensed person
who misuses or misrepresents a contractor license or aids and abets
another person to do so. ( Status : This bill has been referred to
the Assembly Business, Professions and Consumer Protection (BP&CP)
Committee.)
SB 262 (Monning) requires the person qualifying on behalf of a
contracting firm to be responsible for exercising direct supervision
and control in order to secure full compliance with the Contractors
Law. Provides that failure to exercise direct supervision and
control shall constitute a cause for disciplinary action and shall
be punishable as a misdemeanor by imprisonment in county jail, by a
fine of not less than $3,000, but not to more than $5,000, or by
both a fine and imprisonment. ( Status : This bill has been referred
to the Assembly BP&CP Committee.)
SB 263 (Monning) clarifies the misdemeanor penalty for a person
engaging in the business or acting in the capacity of a contractor
to also include a person who has never been a licensed contractor,
or a person who was licensed but who acts under a license that is
inactive, expired, revoked, or under suspension for any reason.
Provides that a contractor may pursue payment for any work on the
contract while duly licensed, but precludes payment for work
performed in a classification in which the contractor was not
licensed, or was under license suspension, or under an expired or
inactive license when the work was performed. ( Status : This bill
has been referred to the Assembly BP&CP Committee.)
AB 993 (Linder) revises the CSLB arbitration program which allows for
an alternative dispute resolution process between consumers and
contractors for claims up to $50,000. ( Status : This bill is pending
referral in the Senate.)
AB 433 (Gordon) authorizes licensed plumbing contractors to install
residential fire protection systems for single- and two-family
homes, and makes other technical and clarifying amendments.
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( Status : This bill has been referred to Senate BP&ED for hearing.)
8.Arguments in Support. In sponsoring the bill, the Association of
California Insurance Companies (ACIC) writes that in authorizing
contractors to be licensed as LLCs the requirement that insurance be
written by licensed insurers unduly limits the benefit of the law.
ACIC states that several businesses, including contractors, may not
have access to available insurance coverage with licensed insurers,
referred to also as the admitted market. They state that
contractors and other design professionals may find that insurance
in the admitted market is not available in many cases. 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 pursuant to the
California Insurance Code. ACIC believes that this bill would
appropriately permit LLCs to additionally meet their liability
insurance requirements with a policy written by an eligible surplus
line insurer. This would broaden and maintain consistent access to
the benefit of this law, according to ACIC.
American International Group (AIG) argues that there is not a similar
requirement for other professionals such as architects, accountants
or insurance agents and brokers organized as LLCs to purchase
liability coverage from a California admitted insurer.
Associated General Contractors (AGC) states that SB 392 (Florez) did
not specifically reference a "surplus lines" carrier, and therefore,
the bill only allowed contractors to purchase insurance from the
admitted market. However, much of this coverage is only sold on the
surplus lines market, which writes coverage for more complex
businesses. There are many contractors in California that operate
as corporations who use a surplus line carrier for their liability
insurance. This bill would conform this provision so that a
contractor does not have to change carriers should the company apply
for LLC status as well.
The California State Association of Electrical Workers , the Western
States Council of Sheet Metal Workers , and the California State Pipe
Trades Council supports the bill arguing that surplus line carriers
generally enjoy stronger financial backing than admitted carriers.
The Surplus Line Association of California argues that the requirement
that insurance must be underwritten by and admitted carrier is
limiting in the marketplace and counter to the overarching insurance
convention developed in California over many decades.
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NOTE : Double-referral to Insurance Committee.
SUPPORT AND OPPOSITION:
Support:
Association of California Insurance Companies (Sponsor)
American International Group
Associated General Contractors
California State Association of Electrical Workers
California State Pipe Trades Council
Surplus Line Association of California
Western States Council of Sheet Metal Workers
Opposition:
None received as of June 4, 2013
Consultant:G. V. Ayers