BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 1008 (Padilla)
As Amended March 15, 2010
Hearing Date: April 20, 2010
Fiscal: Yes
Urgency: No
TW:jd
SUBJECT
Engineering and Land Surveying: Limited Liability Partnerships
DESCRIPTION
This bill, sponsored by the American Council of Engineering
Companies - California (ACEC CA), authorizes licensed engineers
and land surveyors to organize and operate as limited liability
partnerships (LLPs), as specified, and requires engineers and
land surveyors organizing as LLPs to carry insurance liability
coverage, as specified.
BACKGROUND
Under the Beverly-Killea Limited Liability Company Act (the LLC
Act) (SB 469 (Beverly, Killea, Chapter 1200, Statutes of 1994)),
a foreign or domestic limited liability company (LLC) is
prohibited from rendering professional services in this state
unless expressly authorized under applicable provisions of law.
Professional services are those services for which a license,
certification, or registration is required under specified
statutes. Thus, law, accountancy, and architectural firms could
not take advantage of the legislation.
In 1995, SB 513 (Calderon, Chapter 679, Statutes of 1995),
sponsored and supported by law and accountancy firms, authorized
the establishment of LLPs for licensed attorneys and licensed
accountants, provided that the LLP purchased a liability
insurance policy or maintained bank deposits of at least
$100,000 per limited liability partner (or an aggregate of not
less than $500,000 for fewer than five partners and not more
than $5 million for all others). Only partnerships with a net
(more)
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worth of $10 million or more were allowed to become LLPs. In
1998, architects were allowed to form LLPs under the same
conditions as accountants and attorneys, for a trial period of
ten years (AB 469 (Cardoza, Chapter 504, Statutes of 1998)).
In 2003, AB 1265 (Benoit, 2003), discussed in greater detail
below, would have authorized engineers and land surveyors to
practice within the scope of their licensure as an LLP with the
same insurance liability coverage requirements as that of
architects. This bill was held in this Committee due to
concerns regarding inadequate insurance coverage. In 2006, the
repeal date for architects was extended to 2012, and the
liability coverage requirement was increased to $1,000,000 for
partnerships of five or fewer licensees, and an additional
$100,000 per additional licensee up to a maximum of $5,000,000.
(AB 2914 (Leno, Ch. 426, Stats. 2006).) In 2007, SB 414
(Corbett, Chapter 80, Statutes of 2007) updated the liability
coverage requirement for accountants and attorneys.
Senate Bill 392 (Florez, 2009), currently with the Assembly
Judiciary Committee, would allow contractors to organize as an
LLC. As discussed above, a foreign or domestic LLC is
prohibited from rendering professional services unless expressly
authorized under applicable provisions of law. The rationale
for this exclusion was that service providers who harm the
public through negligence or misconduct should not be insulated
from personal liability.
This bill would allow engineers and architects to organize as
LLPs and would require these LLPs to carry the same insurance
liability coverages as those required of accountants and
architects.
This bill was approved by the Senate Committee on Business,
Professions and Economic Development on April 5, 2010, by a vote
of 7 to 0.
CHANGES TO EXISTING LAW
Existing law provides that members of an LLP are liable for loss
or injury caused by the wrongful acts of a general partner
acting in the ordinary course of activities of the limited
partnership or with authority of the limited partnership.
(Corp. Code Sec. 15904.03.)
Existing law does not prohibit civil, electrical, mechanical
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engineers, or land surveyors from practicing as a sole
proprietorship, partnership, firm, or corporation, as specified.
(Bus. & Prof. Code Secs. 6738, 8729.)
Existing law defines "foreign limited liability partnership" to
include partnerships licensed to engage in the practice of
architecture, public accountancy, or the practice of law.
(Corp. Code Sec. 16100(6)(A).)
Existing law defines "registered limited liability partnership"
to include persons licensed to engage in the practice of
architecture, public accountancy, or law. (Corp. Code Sec.
16100(8)(A).)
Existing law defines "professional limited liability partnership
services" to include the practice of architecture, public
accountancy, or law. (Corp. Code Sec. 16100(14).)
Existing law provides that general partners of LLPs are jointly
and severally liable for all obligations of the limited
partnership. (Corp. Code Sec. 15904.04.)
Existing law requires that every registered limited liability
partnership and foreign limited liability partnership provide
security for claims, as specified. (Corp. Code Sec. 16956.)
Existing law provides a sunset on the ability of architects to
organize as limited liability partnerships as of January 1,
2012. (Corp. Code Sec. 16101(19).)
This bill would add limited liability partnerships to the list
of approved organizations that can be formed by civil,
electrical, or mechanical engineers and land surveyors.
This bill would include the practices of engineering and land
surveying in the definitions of "foreign limited liability
partnership," "registered limited liability partnership," and
"professional limited liability partnership services."
This bill would allow engineers and land surveyors to organize
as limited liability partnerships.
This bill would require engineers and land surveyors organizing
as registered limited liability partnerships or foreign limited
liability partnerships to provide security for claims by either:
(1) maintaining insurance policies in the amount of at least $1
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million for five or less licensees rendering services, with an
additional $100,000 for each additional licensee, and an
aggregate limit of liability not to exceed $5 million; (2)
maintaining the same amounts in trust or bank issue; (3) each
partner personally guaranteeing payment of the difference
between the maximum amount of security required and the security
otherwise provided; or (4) confirming the partnership has a net
worth equal to or exceeding $10 million.
COMMENT
1. Stated need for the bill
The author writes:
Currently engineering and land surveying firms are prohibited
in California from forming limited liability partnerships
(LLP) . . . . SB 1008 would extend the Limited Liability
Partnership (LLP) authority to engineering, land surveying
firms. ACEC CA firms commonly use the LLP structure in other
states and when they try to bring those business models here,
to comply with existing law, they must completely restructure
business relationships and models.
The American Council of Engineering Companies - California (ACEC
CA) argues:
[Senate Bill 1008] will encourage the expansion of business
practices while bringing California into parity with the vast
majority of other states, all of which allow professional
services to be engaged in these business structures.
Allowing engineering and land surveying firms the option to
structure as LLP's will provide additional flexibility that
will encourage business expansion in some instances, while
boosting project delivery options.
2. History behind insurance requirement for professional
providers
The LLC Act prohibits LLCs from rendering professional services
for which a license, registration or certification is required.
This issue was heavily debated in SB 469 (Beverly, Killea, 1994)
and its trailer bill, SB 141 (Beverly, 1996). That debate
centered on whether 54 categories of professional service
providers should be authorized to operate as "LLCs" without any
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particularized showing of need. Another issue was whether the
"professional service" LLC should be required to carry some
specified level of insurance as a condition of becoming an LLC.
Because of the limited liability attributes of an LLC, a
claimant injured by a person operating as a LLC could no longer
collect a claim against the person's personal assets. An
insurance requirement was suggested as a compromise to ensure
the injured party some recovery should the LLC business have
little or no assets because the profits are regularly
distributed to its members.
The State Bar Business Law Section, sponsor of those measures,
agreed that some level of insurance should be required but could
not agree on the specified amounts of insurance for the 15 to
54 professions it proposed for LLC status. Nor was a showing of
particular need ever made. When no agreement could be reached
on the insurance requirements, the provision was dropped from
the bill.
Since then, as noted, above, accounting, law, and architectural
firms have sponsored their own bills to allow them to operate
"limited liability partnerships" as long as they meet certain
insurance requirements. (See SB 513 (Calderon, Ch. 679, Stats.
1995); AB 469 (Cardoza, Ch. 504, Stats. 1998).)
This bill follows those examples to allow additional classes of
service providers, engineers and land surveyors, to operate as
an LLP so long as the business satisfies similar insurance
requirements.
3. This bill is similar to AB 1265 and raises the same
liability coverage issues
AB 1265 (Benoit, 2003) was the first attempt to add engineers
and land surveyors to the list of professions that could
organize as LLPs. AB 1265 was analyzed extensively with regard
to the insurance coverage requirements. This bill raises the
same liability coverage issues as AB 1265, as discussed below.
a. Proposed liability coverage levels could increase
insurance coverages purchased, not decrease coverage as
proposed by AB 1265
As a condition of operating as an LLP, SB 1008 would require
an engineer and land surveyor LLP to maintain liability
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insurance of at least $1 million or an amount equal to
$100,000 multiplied by the number of licensees rendering
professional services, whichever is greater, up to a maximum
of $5 million, for claims arising from acts, errors, or
omissions arising out of the practice of engineering or land
surveying. Hence, for example, a two-person firm would be
required to carry at least $1 million of insurance and a
ten-person firm would be required to carry at least $1.5
million in coverage.
According to insurance and claims data summarized by ACEC CA
and provided to Committee staff, 21.4 percent of the policies
are for $500,000 or less, 64.37 percent are for $1 million,
12.68 percent are for $2 million, and 1.54 percent purchase
over $2 million in insurance. Under AB 1265, the insurance
liability requirement started at $500,000 and was capped at $1
million, creating the concern that firms would actually
decrease their limits. Under this bill, however, an
engineering firm would need to buy at least $1 million in
insurance to obtain limited liability partnership protection
if the firm had five or fewer engineers, with an overall cap
at $5 million. No information was provided regarding the
size of the firms covered by the insurance and claims data,
but conceivably, the firms that now buy $500,000 or less of
insurance would have to increase their limits to purchase the
bare minimum required by law.
b. Proposed level of insurance would have been
adequate to cover more claims than under AB 1265, but the
insurance data claims suggest the limit should be higher
AB 1265 only provided for minimum insurance liability coverage
of $500,000 for firms of five or less partners. SB 1008
provides for $1 million minimum liability coverage. Yet,
according to the provided data, the highest claims paid in
five of the last 15 years surveyed exceeded $1 million. The
highest were $3.5 million in 2002, $1.45 million in 1995,
$1.15 million in 1994, $1,100,000 in 2003, and $1,086,500 in
1998.
Data showing the frequency of such high payouts was requested
but denied by all but one insurer. That insurer, representing
about 40 percent of the market, indicated that in the past
five years, one claim exceeded $1.5 million (but did not
indicate by how much), two claims were within the $1 to $1.25
million range, and two were within the $500,000 to $1 million
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range (out of 34 claims). The largest insurer, who would not
provide detailed data, reports: "Claims over $1 M typically
represent less than two percent of our claims with actual
indemnity payments, and closer to .50 of all claims made."
Under the minimum coverage proposed by AB 1265, only two of
the ten highest claims would have been covered. Under SB
1008, only five of the highest claims would have been covered.
To address this issue and provide that the insurance
liability coverage could cover all but one of the largest
claims, the Committee staff suggests amending the bill as
follows:
Page 18, line 38 insert "five hundred thousand" before
"dollars"
Page 18, line 38 strike "$1,000,000" and insert
"$1,500,000"
Page 19, line 36 insert "five hundred thousand" before
"dollars"
Page 19, line 36 strike "$1,000,000" and insert
"$1,500,000"
4. Liability coverage requirement the same as for architects and
accountants
The author has mirrored the liability coverage provisions to
those required of architects and accountants, rather than the
higher limits required of law firms.
Attorneys organized as LLPs have similar requirements with the
following differences: (1) the insurance policy aggregate is
not required to exceed $7.5 million instead of $5 million; (2)
the security amount is not required to exceed $7. 5 million
instead of $5 million; and (3) confirmation of net worth equal
to or exceeding $15 million instead of $10 million.
As discussed above, although architects and accountants are only
required to meet lower levels, the insurance data provided
regarding engineers and land surveyors suggests that higher
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limits should be imposed. However, the data does not suggest
the need for limits as high as those for attorneys. A sunset
provision, discussed below, would allow the issue to be
revisited should the mandated insurance coverage prove to be
problematic.
5. SB 392 allows professionals to form LLCs, shielding these
professionals from liability; SB 1008 allows professionals to
form LLPs, which does not create the same liability concerns
As discussed above, SB 392 would allow contractors to organize
as LLCs. LLCs shield their members from personal liability
while members of an LLP are liable for general partner's acts to
the extent of their investment in the LLP, and general partners
are liable jointly and severally for all obligations of the
limited partnership. Because SB 1008 would allow engineers and
land surveyors to organize as an LLP, without the liability
protections provided to LLCs, SB 1008 does not raise the same
concerns as SB 392.
6. Sunset provision should be included
Due to the history of the sunset provision as required for
architects, AB 469 (Cardoza, Ch. 504, Stats. 1998), which like
this bill also proposed to add a licensed profession to the list
of approved LLPs, was amended by this Committee to include a
five-year sunset. Two additional bills, AB 1596 (Shelley,
Chapter 595, Statutes of 2001) and AB 2914 (Leno, Chapter 426,
Statutes of 2006) extended the sunset date permitting architects
to organize as LLPs. Because this bill raises similar concerns,
the Committee may wish to similarly amend the bill as follows:
Suggested Amendment :
Include a five-year sunset in the bill.
Support : California Business Properties Association; California
Chamber of Commerce
Opposition : None Known
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HISTORY
Source : American Council of Engineering Companies - California
(ACEC CA)
Related Pending Legislation : SB 392 (Florez, 2009) would
authorize contractors to organize as limited liability
corporations even though the Beverly-Killea Limited Liability
Company Act prohibits companies organized under this Act from
rendering professional services. This bill is currently in the
Assembly Judiciary Committee.
Prior Legislation :
SB 414 (Corbett, Ch. 80, Stats. 2007) increased the liability
coverage amounts for accountancy and law LLPs.
AB 2914 (Leno, Ch. 426, Stats. 2006) extended the sunset date
permitting architects to organize as LLPs to January 1, 2012.
AB 180 (Horton, 2005) was substantially similar to SB 1008 in
its provisions of the organization of engineers and land
surveyors as LLPs, but AB 180 was amended to include a sunset
provision. That bill passed this Committee 6-0 and was
re-referred to the Committee on Appropriations. This bill was
ultimately amended to deal with a different topic.
AB 1265 (Benoit, 2003) (See Comment 2.)
AB 1596 (Shelley, Ch. 595, Stats. 2001) extended the sunset date
permitting architects to organize as LLPs to January 1, 2007.
AB 469 (Cardoza, Ch. 504, Stats. 1998) authorized architects to
form LLPs with insurance liability coverage minimums, as
specified, and a sunset date of January 1, 2002.
SB 513 (Calderon, Ch. 679, Stats. 1995) permitted accountants
and attorneys to form LLPs with insurance liability coverage
minimums, as specified.
SB 469 (Beverly, Killea, Ch. 1200, Stats. 1994) (See
Background.)
Prior Vote : Senate Committee on Business, Professions and
Economic Development (Ayes 7, Noes 0)
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