BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 1236 (Hagman) Hearing Date: June 26, 2013
As Amended:April 8, 2013
Fiscal: No
Urgency: No
VOTES: Sen. B.P.&E.D.(06/10/13)10-0/Pass
Asm. Floor
(05/02/13) 75-0/Pass
Asm. Ins. (04/24/13)13-0/Pass
Asm. B.P.&C.P. (04/16/13)11-0/Pass
SUMMARY: Would authorize a licensed contractor organized as a
limited liability company (LLC) to obtain statutorily required
liability insurance from a nonadmitted insurer through a surplus
line broker.
DIGEST
Existing law
1. Provides for the licensure and regulation of contractors by
the Contractors' State License Board. (Contractors' State
License Law ,Bus. & Prof. Code §§ 7000 et seq.)
2. Authorizes the Contractors' State License Board to issue a
contractor's license to a limited liability company (LLC),
but requires as a condition precedent to the issuance,
reissuance, reinstatement, reactivation, renewal, or
continued valid use of a LLC contractor's license, that the
applicant or licensee file or have on file a surety bond for
damages arising out of specified claims of employees.
3. Requires an LLC to maintain a policy or policies of
insurance against liability imposed on or against it for
damages arising out of claims, as specified, as a condition
of licensure.
AB 1236 (Hagman), Page 2
4. Requires that the policy or policies of insurance secured
to satisfy the requirements of licensure be written by an
insurer or insurers duly licensed by this state (an
"admitted" insurer).
AB 1236 (Hagman), Page 3
This bill
Would authorize a licensed contractor organized as a
limited liability company (LLC) to obtain statutorily
required liability insurance from a nonadmitted insurer
through a surplus line broker.
COMMENTS
1. Purpose of the bill . According to the author, in 2010, SB
392 (Florez), granted LLC status to contractors. One of the
provisions within the bill for insurance stated that the
carrier had to be a California admitted carrier but did not
specifically reference 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 lines market, which writes coverages for
more complex businesses. There are many contractors in
California that operate using a surplus line carrier for
their general liability insurance. AB 1236 is needed to
clarify that surplus line insurers can write insurance
policies for contractors who need access to these carriers
in their line of work.
2. Background
A. The Limited Liability Company (LLC). An LLC is a
legal entity formed to allow one or more owners to
conduct a business without any owner having personal
liability for the obligations of the business. The LLC
structure is attractive because it offers organizational
flexibility unavailable to corporations, as well as
favorable income tax treatment. But limited liability
also limits the available assets that may be used to
satisfy legal judgments. Adequate liability insurance
coverage ensures that an LLC has the financial ability
to respond to legal judgments for contract or tort
claims.
B. Licensed Contactor 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
AB 1236 (Hagman), Page 4
of licensure. This includes a requirement that 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.
(Bus. & Prof. Code § 7071.19.)
C. Surplus Lines Insurance. Surplus line companies
offer insurance to is not readily available from
insurers authorized to sell insurance in California.
Surplus line insurers are not licensed by the California
Department of Insurance (CDI), do not participate in the
California Insurance Guarantee Association (an
additional protection for consumer in case of insurer
insolvency), and are not subject to the same standards
as California admitted insurers. However, surplus lines
insurers must meet some specific requirements to conduct
business in California (see Ins. Code §§ 1765.1 and
1765.2) and to be added to the List of Approved Surplus
Line Insurers (LASLI), a voluntary list of pre-approved
nonadmitted insurers. (The LASLI list is not exhaustive
and a broker may solicit and place policies with an
insurer absent from the LASLI list so long as the broker
has determined at the time of placement that the insurer
meets eligibility criteria.)
Additionally, consumers cannot purchase surplus lines
insurance directly, they must go through a broker
specially licensed by CDI. The broker must make a
diligent search of the same coverage in the admitted
marked before placing a policy with a surplus lines
insurer. (Ins. Code § 1763.) A general rule of thumb
states that a broker has made a diligent search if three
admitted insurers that write the type of insurance has
declined the risk or that fewer than three insurers
write that particular risk.
1. Arguments in Support
A. Associated General Contractors explains that current
law requires insurance that is only sold on the surplus
AB 1236 (Hagman), Page 5
lines market, which writes coverage for more complex
businesses. Many contractors in California that operate
as corporations use a surplus lines carrier for their
liability insurance. AB 1236 would permit contractors
to apply for LLC status without changing carriers. The
National Association of Professional Surplus Lines
Offices and the Council of Insurance Agents & Brokers
contend that this bill will level the playing field for
LLC and non-LLC contractors.
B. The Association of California Insurance Companies
and several other proponents argue that surplus line
insurers offer reliable coverage. Specifically, they
point out that 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.
C. 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.
D. American International Group (AIG) and other
proponents note that a requirement to obtain insurance
only from admitted insurers is unique to contractors
organized as LLCs. Several proponents explain that
there is no similar requirement for other professionals
organized as LLCs, such as architects, accountants or
insurance agents and brokers.
AB 1236 (Hagman), Page 6
1. Arguments in Opposition
None received.
2. Prior Legislation
SB 392 (Florez), Chapter 698, Statutes of 2010, permitted
licensed contractors to organize as an LLC.
POSITIONS
Support
Association of California Insurance Companies (sponsor)
American International Group
Associated General Contractors
California Insurance Wholesalers Association
California State Pipes Council
Council of Insurance Agents and Brokers
California State Association of Electrical Workers
Independent Insurance Agent & Brokers of California
National Association of Professional Lines Offices
Surplus Line Association of California
Western States Council of Sheet Metal Workers
Oppose
None received.
Consultant: Hugh Slayden, (916) 651-4773