BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     SB 465


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          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.)








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          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))








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          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  








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               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,  








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            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  








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          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  








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          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.








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          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,  








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          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."










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           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  








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          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  








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          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  








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            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 








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          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