BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1236|
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CONSENT
Bill No: AB 1236
Author: Hagman (R)
Amended: 4/8/13 in Assembly
Vote: 21
SENATE BUSINESS, PROF. & ECON. DEV. COMMITTEE : 10-0, 6/10/13
AYES: Lieu, Emmerson, Block, Corbett, Galgiani, Hernandez,
Hill, Padilla, Wyland, Yee
SENATE INSURANCE COMMITTEE : 9-0, 6/26/13
AYES: Calderon, Gaines, Corbett, Correa, Knight, Lieu, Nielsen,
Roth, Torres
ASSEMBLY FLOOR : 75-0, 5/2/13 (Consent) - See last page for vote
SUBJECT : Contractors: limited liability companies
SOURCE : Association of California Insurance Companies
DIGEST : This bill authorizes a contractor licensed as a
limited liability company (LLC) to obtain statutorily required
liability insurance from a surplus line insurer.
ANALYSIS :
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
CONTINUED
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of Consumer Affairs (DCA). The CSLB is under the direction
of the Registrar of Contractors (Registrar).
2. Authorizes the issuance of a contractor license to an
individual owner, co-partnership, corporation, joint venture,
or an LLC.
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.
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.
5. Requires a non-admitted insurer to maintain a minimum of $45
million in capital and surplus, unless otherwise exempted.
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.
Background
Professional licenses and LLCs . The formation and operation of
LLCs in California was authorized in 1994 through the
Beverly-Killea Limited Liability Company Act (SB 469, Beverly,
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 LLC to render
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professional services, as defined in the Corporations Code,
unless expressly authorized under applicable provisions of the
Business and Professions Code (BPC) 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 Section 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 BPC, 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 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.
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.
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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.
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.
Insurance terminology . An "admitted" insurer is one that is
licensed and regulated by the Department of Insurance (CDI).
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 CDI (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 Insurance
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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.
Fewer consumer options if surplus line becomes insolvent . The
CDI has a more limited jurisdiction when consumer problems arise
in connection with insurance written by a non-admitted insurer
than with an admitted insurer. CDI 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, CDI 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 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 6/27/13)
Association of California Insurance Companies (source)
American International Group
Associated General Contractors
California Insurance Wholesalers Association
California State Association of Electrical Workers
California State Pipe Trades Council
Independent Insurance Agents and Brokers of California
Surplus Line Association of California
Western States Council of Sheet Metal Workers
ARGUMENTS IN SUPPORT : The bill's sponsor, 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
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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 will appropriately
permit LLCs to additionally meet their liability insurance
requirements with a policy written by an eligible surplus line
insurer. This will broaden and maintain consistent access to
the benefit of this law, according to ACIC.
American International Group 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 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
conforms 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 state 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.
ASSEMBLY FLOOR : 75-0, 5/2/13
AYES: Achadjian, Alejo, Allen, Ammiano, Bigelow, Bloom,
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Blumenfield, Bocanegra, Bonilla, Bonta, Bradford, Brown,
Buchanan, Ian Calderon, Campos, Chau, Chávez, Chesbro, Conway,
Cooley, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox,
Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gordon, Gorell,
Gray, Grove, Hagman, Harkey, Roger Hernández, Holden,
Jones-Sawyer, Levine, Linder, Logue, Lowenthal, Maienschein,
Mansoor, Medina, Melendez, Mitchell, Morrell, Mullin,
Muratsuchi, Nazarian, Nestande, Olsen, Pan, Patterson, Perea,
V. Manuel Pérez, Quirk, Quirk-Silva, Rendon, Salas, Skinner,
Stone, Ting, Torres, Wagner, Waldron, Weber, Wieckowski, Wilk,
Yamada, John A. Pérez
NO VOTE RECORDED: Atkins, Hall, Jones, Williams, Vacancy
MW:k 6/28/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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