BILL ANALYSIS Ó SB 465 Page 1 Date of Hearing: July 14, 2015 ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS Susan Bonilla, Chair SB 465(Hill) - As Amended July 8, 2015 SENATE VOTE: 40-0 SUBJECT: Contractors: discipline. SUMMARY: Requires licensed contractors, within 90 days of a conviction or infraction, to report to the Contractors State License Board (CSLB) if the licensee has been convicted of any felony, or any other crime substantially related to the qualifications, functions, and duties of a licensed contractor, or has been subject to a civil action settlement or binding arbitration award above a certain amount resulting from specified acts, and requires that information to be made available to the public if the CSLB investigates that settlement or binding arbitration award, as specified. EXISTING LAW: 1)Provides for the licensure and regulation of more than 300,000 contractors under the Contractors' State License Law by the 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) Section 7000 et seq.) SB 465 Page 2 2)Requires licensees to notify the Registrar in writing of any unsatisfied final judgment imposed on the licensee, and authorizes the Registrar to automatically suspend the license on the date the Registrar is informed of an unsatisfied final judgment if the licensee failed to notify the Registrar in writing within 90 days of that judgment, as specified. (BPC 7071.17(b)) 3)Provides that a conviction of a crime, substantially related to the qualifications, functions and duties of a contractor, constitutes a cause for disciplinary action, and that the record of the conviction shall be conclusive evidence thereof. (BPC Section 7123) 4)Provides that a plea or verdict of guilty, or a conviction following a plea of nolo contendere, is deemed to be a conviction, and that the CSLB may order a license to be suspended or revoked, or may decline to issue a license, when the time for appeal has elapsed, or the judgment of conviction has been affirmed on appeal, as specified. (BPC Section 7124) 5)Requires the Registrar to make available to the public the date, nature, and status of all complaints on file against a licensee that do either of the following: a) Have been referred for accusation; or, b) Have been referred for investigation, after a determination by CSLB enforcement staff, that a probable violation has occurred, and have been reviewed by a supervisor, and involve allegations that if proven would present a risk of harm to the public and would be appropriate for suspension or revocation of the contractor's license or criminal prosecution. (BPC Section 7124.6 (a)) SB 465 Page 3 6)Requires the CSLB to create a disclaimer that shall accompany the disclosure stating that it is an allegation and any other information the CSLB determines would be relevant to a person evaluating the complaint. (BPC Section 7124.6 (b)) 7)Provides that a complaint resolved in favor of the contractor shall not be subject to disclosure. (BPC Section 7124.6(c)) 8)Requires the Registrar to make available to the public the date, nature, and disposition of all legal actions, subject to the following: a) Limits the disclosure of legal actions for citations from the date of issuance for five years after the date of compliance if no additional disciplinary actions have been taken against the licensee during that period; b) Limits the disclosure of accusations that result in suspension, stayed suspension, or stayed revocation of the contractor's license from the date accusation is filed for seven years if no additional disciplinary actions have been taken against the licensee during that period; and, c) All revocations that are not stayed shall be disclosed indefinitely from the effective date of the revocation. (BPC Section 7124.6(e)) THIS BILL: 9)Requires a licensee, within 90 days, to report to the Registrar in writing the occurrence of any of the of the following events: a) Conviction of any felony; b) Conviction of any crime that is substantially related to SB 465 Page 4 the qualifications, functions, and duties of a licensed contractor; c) A civil action settlement or administrative action resulting in a settlement, if the amount is $50,000 or greater, involving fraud, deceit, misrepresentation, breach or violation of a contract, negligence, incompetence, or recklessness by the licensee; or, d) A binding arbitration award or administrative action resulting in binding arbitration award, if the amount is $25,000 or greater, involving fraud, deceit, misrepresentation breach or violation of a contract, negligence, incompetence, or recklessness, by the licensee. 10)Specifies that failure of the licensee to report to the Registrar the events in paragraph 1) above is grounds for disciplinary action. 11)Defines "conviction" to mean a plea or verdict of guilty in a criminal proceeding, or a conviction following a plea of no contest. 12)Requires an insurer providing professional liability insurance to a licensee, to report to the Registrar, within 30 days of payment of a civil action settlement or arbitration award against a licensee, as described in paragraph 1) above, the name of the licensee, the amount of the settlement or arbitration award, the amount paid, and the identity of payee. 13)Requires a state or local government agency that self-insures to report to the Registrar within 30 days of payment of a civil action settlement or arbitration award against a licensee, as described in paragraph 1) above, the name of the licensee, the amount of the settlement or arbitration award, SB 465 Page 5 the amount paid, and the identity of payee. 14)Requires the Registrar to make available to the public all civil action settlements, binding arbitration awards, and administrative actions, as described in paragraph 1) above, reported to it if those settlements or arbitration awards have been referred for investigation, as specified. 15)Provides that all of these provisions shall only become operative if the Legislature appropriates money from the Contractors' State License Fund for the purposes of this section and grants sufficient hiring authority to the CSLB. FISCAL EFFECT: Unknown. This bill is keyed "fiscal" by the Legislative Counsel. COMMENTS: Purpose. This bill is sponsored by the author. According to the author, this bill is needed to amend state law because "Currently, state law does not require contractors to report defect settlement cases to the CSLB. Such disclosure requirements are routine for such professionals as doctors, architects, and engineers. This bill would empower the CSLB, like other boards, to be made aware of licensee behavior for which they may need to take swift action to promote public health and safety. The bill additionally increases transparency so that consumers have the tools necessary to make an informed decision about the quality of the contractor they hire." Background. According to the author, this bill increases transparency so that consumers have the tools necessary to make an informed decision about the quality of the contractor they SB 465 Page 6 hire. The bill also establishes greater accountability for contractors by ensuring the public has critical information about licensees. As an example of this need for transparency, the author notes the tragic Berkeley balcony collapse, which killed six people. According to the San Francisco Chronicle, the company responsible for that project reportedly paid out $26.5 million in construction defect settlements in just three years, yet the CSLB, the state agency tasked with protecting consumers from possibly lethal construction, remained ignorant of such settlements. This is because licensees are not required by law to report the result of incidents that are not handled directly by the CSLB, to the Registrar. As a result, information that can be used to help consumers protect themselves from possible fraud or misrepresentation is not known. Specifically, SB 465 requires both licensees and insurers to report to the CSLB certain settlements, arbitration awards and administrative actions regarding a licensee as well as convictions of crimes related to a licensee's practice as a contractor. The bill also requires the Registrar of the CSLB to make available to the public civil action settlements, binding arbitration awards, and administrative actions that are required to be reported to CSLB if the CSLB refers those settlements or arbitration awards for investigation after staff determines, and a supervisor has reviewed, that a probable violation has occurred and involves allegations that, if proven, would present a risk of harm to the public and would be appropriate for suspension or revocation of the licensee, or criminal prosecution. This standard is in existing law, which already requires CSLB to report complaints that meet this standard to the public. Similar to other regulatory entities, in order to determine whether a complaint is appropriate for investigation, the CSLB reviews information on a case-by-case basis, looking at such factors as the severity of the allegations, and whether a SB 465 Page 7 licensee has a history of complaints or discipline. Complaints involving a threat to the public's health and safety, and cases where consumers have suffered a significant financial injury are given the highest priority. As a result, only those settlements or arbitration awards that are investigated, and would subject a licensee to suspension, revocation, or criminal prosecution, not merely just a citation, would be made available to the public, which is the type of information that is already disclosed. In addition, licensees are already required to report unsatisfied final judgments to the CSLB, and are required to disclose convictions when applying for licensure. For licensees that have already been fingerprinted by the CSLB, the CSLB will receive notifications from the Department of Justice when that licensee is the subject to additional criminal action; however, not all licensees have submitted their fingerprints to the CSLB. Similar Reporting Requirements Exist for Other Professions. Architects, and the companies that insure them, are required to report to their board any civil action judgment, settlement, arbitration award, or administrative action resulting in a judgment, settlement, or arbitration award against the licensee in any action alleging fraud, deceit, negligence, incompetence, or recklessness by the licensee in the practice of architecture if the amount or value of the judgment, settlement, or arbitration award is five thousand dollars ($5,000) or greater. The report is made within 30 days of payment of all or any portion of the action. This also applies if a party to the civil action, settlement, arbitration award, or administrative action is or was a sole proprietorship, partnership, firm, corporation, or state or local governmental agency in which a licensee is or was an owner, partner, member, officer, or employee and is or was a licensee in responsible control of that portion of the project that was the subject of the civil judgment, settlement, arbitration award, or administrative action. The licensee will not be found to have violated a confidential settlement agreement or other confidential agreement by providing a report to the board. SB 465 Page 8 Similar requirements exist for other licensed professionals, including engineers (BPC Section 6770), land surveyors (BPC Section 8776), medical professionals (BPC Section 801), and accountants (BPC Section 5063). This bill is seeking to establish consistency with other occupations that have as much of an impact on the safety and well-being of the general public. Current Related Legislation. SB 467 (Hill) of the current legislative session, among other things, extends the sunset date for the CSLB until January 1, 2020, repeals a requirement relating to evidence of financial solvency, and increases the amount for a licensee to be bonded from $12,500 to $15,000, as specified. STATUS: This bill is in the Assembly Appropriations Committee. Prior Related Legislation. AB 2570 (Hill), Chapter 561, Statutes of 2012, prohibited licensees of any board, bureau or program under the DCA from including a "regulatory gag clause" in civil settlement agreements. SB 679 (Berryhill), Chapter 471, Statutes of 2013, revised the monetary threshold for a licensed engineer or land surveyor to report a civil action settlement or administrative action to the Board for Professional Engineers, Land Surveyors, and Geologists (BPELSG) from "$50,000 or greater" to "greater than $50,000," and requires a licensed engineer or land surveyor to report any civil action judgment or binding arbitration award or administrative action of $25,000 or greater. SB 1549 (Figueroa), Chapter 691, Statutes of 2004, required licensed engineers and land surveyors to report to the BPESLG a felony conviction or a civil judgment, settlement, arbitration award, or administrative action award of $50,000 or more, SB 465 Page 9 occurring on or after July 1, 2006, if funds are appropriated for that purpose, as specified, and required a court rendering the judgment or conviction and a local agency, if self-insured, to report to the board. ARGUMENTS IN SUPPORT: California Newspaper Publishers Association (CNPA) writes in support, stating, "Following the recent balcony collapse in downtown Berkeley, an investigation by the San Francisco Chronicle uncovered that the firm who built the balcony paid $26.5 million in the last three years in construction defect settlements. Often, as here, these settlement agreements remain confidential until a catastrophic event occurs." City of Berkley, Office of the Mayor, writes in support, stating that, "On June 16, 2015 a balcony collapsed in the City of Berkley, tragically leading to the deaths of six young people. Compounding our community's immense sadness is the belief that this unfortunate incident could have been prevented?.The City of Berkeley supports SB 465 because of the increased transparency it will provide for the community when dealing with contractors, allowing for fully informed decisions about contracting work." Center for Public Interest Law writes in support, stating that, "There is simply no public policy reason why architects should be required to report settlements but not the licensees who actually build what the architects draw?.If a pattern of settling cases for significant sums just might shed a poor light on a contractor's competence, then the CSLB should know about the settlements, with licensee knowing that the CSLB will, like its sister boards, review such information proportionately and appropriately." SB 465 Page 10 Center for California Homeowner Association Law writes in support that, "[This information] will benefit consumers, local governments, the nonprofit developers of housing, and even the HUD, which can use [this information] to weed out builders and contractors who produce defective housing or make sub-standard repairs." ARGUMENTS IN OPPOSITION: California Building Industry Association writes in opposition, stating that "We are strongly opposed to the disclosure of settlements and arbitration awards, at least in construction defect cases, because they are not an indication of "bad actors"?.A settlement is not an admission of liability and is not decided by a neutral third party?.The result of a construction defect claim, whether a settlement or arbitration award, arises from a fact well known and relied upon by the construction defect plaintiff's bar: the cost to defend these claims runs between 4 and 23 times the amount of the settlement?. The bill applies to damage even where the contractor unintentionally caused property damage or merely breached a contract provision to perform services or make a payment between contractors. These actions have nothing to do with public safety. Bad actors should not be determined based on actions without fault." Construction Employers' Association (CEA) writes in opposition that, "In a multi-employer environment where the general contractor is the only licensee under contract to the project owner, general contractors are a party to all settlements, regardless of which party caused the underlying problem?.Pursuant to this measure, the general contractor would be required to report any settlements, even if they weren't at fault?.It's also unclear what negligence, incompetence or recklessness mean. If someone is injured and the contractor SB 465 Page 11 found it more expeditious to reach a settlement versus fight, what is that considered?...The general contractor would effectively receive a black mark on their license through no fault of their own. This black mark would invariably be used to disqualify otherwise qualified contractors from bidding." The CEA also notes that while doctors and attorneys report such settlements, in those instances, the doctor or attorney is the one at fault, because there is no subcontractor. United Contractors, Associated General Contractors and Southern California Contractors Association, in a joint letter also write in opposition, "In today's business environment, contractors often need to settle cases even if they are completely without fault. Settlements allow a party to avoid the costly expense of pretrial discovery and a trial. The expense of litigation often is in the hundreds of thousands of dollars, far outweighing even the amounts in dispute. Our contractors and their insurance carriers often settle for far more than $50,000 in order to avoid the expense and disruption of having to go to court?Contractors should not be punished for the litigious environment they are forced to navigate through in order to stay in business." The Association of California Insurance Companies writes in opposition, stating that "The bill also requires professional liability insurers to report the information to the state as well. This is duplicative since the contractor is already required to report this information. This bill would add additional expense to the insurance transaction and could act as disincentive to insurers that may consider expanding into California for contractors' professional liability [market]." Civil Justice Association of California writes in opposition, stating that "SB 465 would make it easier for attorneys to target legitimate contractors for lawsuits. The bill will encourage drive-by litigation, pushing contractors to settle SB 465 Page 12 meritless cases for values below the applicable thresholds ($25,000 or $50,000)?We believe the State already has appropriate tools at its disposal through its regulatory powers. If it cannot do the job now, it should look to restructure the department's operations rather than create both new burdens on contractors and new incentives for drive-by litigation." POLICY ISSUE: According to the opposition, nearly all claims filed against contractors involve a "violation of contract," whether related to breach for non-payment, failure to grant time extensions or for delays, failure to issue change orders, or wages, and that "negligence" may be too broad and encapsulate other types of claims that are not related to the quality of the work. Opposition also notes many lawsuits are settled every year for a myriad of reasons, and that the vast majority of those lawsuits are settled out of court. Lawsuits that are settled typically do not assign fault to any of the parties involved, hence one reason for settling, and usually involve multiple parties regardless of the extent of their involvement in the claim. According to some estimates, there may be thousands of settlements that would have to be reported to the CSLB each year. This bill would only go into effect if the CSLB was appropriated with additional staff. According to the CSLB, it may necessitate hiring three additional staff in order to implement this policy. This number is based upon the Board for Professional Engineers, Land Surveyors, and Geologists' (BPELSG) staffing levels. However it is unknown, at this time, how many settlements or arbitration awards would be reported. If the volume of reports is too large, it may be difficult for the CSLB to sift through this information to determine whether a contractor is truly incompetent, and because most settlements do not assign fault to the numerous SB 465 Page 13 parties involved in a lawsuit, it would be difficult to establish a pattern and assign fault or to determine whether to investigate a contractor without possible extensive research and data collection by the CSLB. As a result, the Committee and author may wish to consider requiring the CSLB to conduct a study on the types and number of settlements and awards that would be reported, pursuant to these provisions, in order to understand the scope of this requirement, and whether the scope is too broad to make this information useful to the CSLB, and the factors that may be useful in helping the CSLB to properly investigate those risking public harm. Additionally, the author may wish to consider narrowing the scope of the bill to only apply to those settlements or arbitration awards that are related to the actual work product, and exempt non-work product related claims to focus the CSLB's attention on licensees who pose the most risk. Lastly, the author may wish to consider requiring the CSLB to adopt regulations that would further define the scope of these reporting requirements, as is required for the BPESLG, and delay the implementation of this bill to allow the CSLB time to prepare to implement these provisions in a meaningful way. REGISTERED SUPPORT: California Newspaper Publishers Association Center for Public Interest Law Center for California Homeowner Association Law City of Berkeley, Office of the Mayor The Miller Law Firm REGISTERED OPPOSITION: Air Conditioning Trade Association SB 465 Page 14 American Fire Sprinkler Association Associated Builders and Contractors - San Diego Chapter Association of California Insurance Companies Associated General Contractors California Building Industry Association California Professional Association of Specialty Contractors Civil Justice Association of California Construction Employers' Association Plumbing-Heating-Cooling Contractors Association of California United Contractors Associated General Contractors Southern California Contractors Association Western Electrical Contractors Association Analysis Prepared by:Robert Boykin and Eunie Linden / B. & P. / (916) 319-3301