BILL ANALYSIS �
SB 865
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Date of Hearing: June 28, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 865 (Negrete McLeod) - As Introduced: February 18, 2011
SENATE VOTE : 36-0
SUBJECT : STATE LIABILITY FOR LEGAL JUDGMENTS AGAINST
CONTRACTORS
KEY ISSUE : SHOULD THE CONTRACTORS LICENSE BOARD TAKE ON
RESPONSIBILITY FOR THE LEGAL LIABILITY OF PERSONS IT HIRES AS
EXPERT WITNESSES AND OTHER OUTSIDE CONTRACTORS?
FISCAL EFFECT : As currently in print this bill is keyed
fiscal.
SYNOPSIS
Under existing law, the state pays for the legal defense of
outside experts and other contractors hired by the Contractors
State License Board (CSLB) to assist in the Board's licensing,
investigation and prosecution functions. This bill would add to
that duty by requiring the state to assume the legal liability
for money damages or other judgment these contractors may incur
in the performance of their work. There is similar authority
for three other professional boards in medicine, accounting and
architecture, although it may be more limited than the
obligation the state would take on with this bill. CSLB argues
that without the benefit of this protection the risk of
financial loss may have a chilling effect on potential industry
experts who might otherwise be unwilling to participate,
although there have been no reported difficulties to date.
SUMMARY : Requires the Contractors State License Board (CSLB) to
indemnify any person it hires if that individual is named as a
defendant in a civil action. Specifically, this bill :
1)Requires CSLB to indemnify any person from any judgment
rendered if the person is a defendant in any of the following
types of civil actions:
a) Defamation;
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b) Tortious interference with prospective business
advantage; or,
c) Any other civil cause of action directly resulting from
opinions rendered, statements made, or testimony given to
CSLB, its committees, staff, legal counsel, or other
representatives, or in any proceeding instituted by CSLB or
to which CSLB is a party.
EXISTING LAW :
1) Requires any board under the Business and Professions Code,
including CSLB, to provide legal representation to any
non-employee hired or under contract to provide expertise to
the board in evaluating an applicant or the conduct of a
licensee when the expert is named as a defendant in a civil
action arising out of opinions rendered, statements made, or
testimony given to the board or its representatives. (Bus.
and Prof. Code section 154.5.)
2)Provides that any board under the B&P Code, including CSLB, is
not liable for judgments rendered against a hired IE in a
civil action, unless otherwise exempted. (Bus. and Prof. Code
section 154.5.)
3)Requires the Attorney General's (AG) services to be utilized
to defend the IE in the civil action and to be charged to
CSLB. (Bus. and Prof. Code section 154.5.)
4)Authorizes CSLB to contract with professionals whose skills
are required to aid in the investigation or prosecution of a
licensee, registrant, or applicant for a license or
registration. (Bus. and Prof. Code section 7019.)
5)Generally provides that if an employee or former employee of a
public entity requests the public entity to defend him or her
against any claim or action against him or her for an injury
arising out of an act or omission occurring within the scope
of his or her employment as an employee of the public entity
and the request is made in writing not less than 10 days
before the day of trial, and the employee or former employee
reasonably cooperates in good faith in the defense of the
claim or action, the public entity shall pay any judgment
based thereon or any compromise or settlement of the claim or
action to which the public entity has agreed. However, where
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the public entity conducted the defense pursuant to an
agreement with the employee or former employee reserving the
rights of the public entity not to pay the judgment,
compromise, or settlement until it is established that the
injury arose out of an act or omission occurring within the
scope of his or her employment as an employee of the public
entity, the public entity is required to pay the judgment,
compromise, or settlement only if it is established that the
injury arose out of an act or omission occurring in the scope
of his or her employment as an employee of the public entity.
(Government Code section 825.)
6)Generally does not allow a public entity to pay that part of a
claim or judgment that is for punitive or exemplary damages
unless the governing body of that public entity finds that the
judgment is based on an act or omission of an employee or
former employee acting within the course and scope of his or
her employment as an employee of the public entity; that at
the time of the act giving rise to the liability, the employee
or former employee acted, or failed to act, in good faith,
without actual malice and in the apparent best interests of
the public entity; and that payment of the claim or judgment
would be in the best interests of the public entity. In the
case of an entity of state government, "a decision of the
governing body" means the approval of the Legislature for
payment of that part of a judgment that is for punitive
damages or exemplary damages, upon recommendation of the
appointing power of the employee or former employee, based
upon the finding by the Legislature and the appointing
authority of the existence of the three conditions for payment
of a punitive or exemplary damages claim. (Gov. Code section
825.)
COMMENTS : According to the author, "When investigating consumer
complaints, CSLB may ask a member of its Industry Expert (IE)
Program to inspect a project and render opinions on specific
items of complaint. They provide expert opinion and testimony
about specific complaint items and accepted trade standards.
Industry experts participate in complaint investigations,
mandatory arbitration, voluntary arbitration, on-site
negotiation, administrative hearings and license exam
development. "
The author states, "Under existing law, CSLB is authorized to
provide industry experts with legal counsel to defend against
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any civil suit resultant from legal actions filed against a
licensee or applicant by CSLB. However, the law does not
authorize CSLB to indemnify experts who become involved in such
suits."
CSLB's Use Of Contracted Experts . CSLB licenses and regulates
over 310,000 licensed contractors in the state. CSLB
administers examinations to test prospective licensees, issuing
licenses, investigating complaints against licensed and
unlicensed contractors, issuing citations, suspending or
revoking licenses, and seeking administrative, criminal, and
civil sanctions against violators.
CSLB's IE Program recruits and trains licensed professionals to
inspect construction jobs and render opinions in response to
complaints lodged. These IEs are licensed or registered
professionals such as contractors, engineers, architects,
geologists, and accountants, or interpreters and manufacturers'
representatives with specific skills and expertise that CSLB may
require in investigations or criminal prosecutions. IEs may be
called on to participate in complaint investigation, mandatory
or voluntary arbitration, on-site negotiation, administrative
hearings, or license exam development. In order to qualify to
become an IE, applicants must have a current contractor's
license that has been free of unresolved licensing and
enforcement actions for the past five years.
CSLB pays licensed professionals for their expert opinion.
Existing Law Allows The State To Pay For The Legal Defense Of
Its Contracted Experts, But Not For The Judgment When The Expert
Is Found To Be Liable For Wrongdoing. Under existing law, CSLB
is authorized to provide industry experts with legal counsel to
defend against any civil suit resultant. Similar authority
exists for the Board of Accountancy, the Architects Board and
the Medical Board, as well as public employees."
Is There A Good Policy Rationale For Subjecting The State To
Additional Liability For The Misconduct Of Its Experts? As the
author indicates, CSLB is authorized - like every other board
established by the Business and Professions Code - to pay for
the legal defense of an outside contractor hired to provide
expertise to the CSLB. This is a prudent practice to ensure
that experts have some protection against the costs of
litigation if they are sued for acts arising out of their
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service to the state, may be a factor in attracting experts, and
helps to insure that the expert does not have a financial
incentive to incriminate the state in order to avoid the cost
associated with defense.
However, the general rule is against covering the cost of the
judgment for the expert's liability when an expert is found to
have violated a legal obligation. Apart from fiscal
considerations, there are other reasons for such a policy,
including the conventional principle that people are generally
thought to adhere to a higher standard of conduct if they face a
potential penalty for acting less carefully. If another party
is responsible for paying that penalty, standards of conduct may
be relaxed.
Despite the general rule against state indemnification for a
contractor's wrongdoing, there may be good policy reasons to
make an exception in some circumstances. CSLB argues that the
rationale for an exception here is that it owes essentially an
ethical obligation to its contractors to protect them against
liability. This rationale would seem to apply equally to every
state agency, and it is not clear what distinguishes the
relationship between CSLB and its contractors from the
relationship between any other agency and its contractors. One
potential justification might be that additional incentive is
needed in order to induce construction experts to voluntarily
participate as CSLB experts. The author makes this point,
stating: "Without the benefit of indemnification, the risk of
financial loss may have a chilling effect on industry experts
who contemplate participation in the industry expert program."
However, CSLB reports that it is not currently having difficulty
obtaining IEs without taking on their liability. While this may
reflect the current excess capacity in the construction
industry, CSLB does not report having experienced difficulty
obtaining IEs when the construction economy was more robust.
CSLB also notes that there has been only one civil action filed
against an IE in recent years, and the judge did not find
liability in that case.
Potential Uncertainty In The Application of The Bill To Claims
Involving Malice. Under this bill the state's responsibility
would extend to defamation, tortious interference with business
advantage, and every other cause of action for which the
contractor is found liable. The author notes that the extent of
the state's potential liability under the bill is limited to
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that allowed under Government Code section 825, which the author
contends exempts unlawful acts involving malice. However, the
exception for malice under Government Code section 825 appears
to be limited to liability for punitive damages, not liability
for other types of damages. Thus, this point may be in doubt
because by specifically including defamation and tortious
interference - both of which involve malice - the bill appears
to contradict itself.
Should The Bill Require The Contractor To Pay Back The Cost of
Defense If He or She Is Found Liable For Punitive Damages Or
Should The State's Assumption of Liability Be Discretionary
Rather Than Automatic? An existing provision allows the Medical
Board to assume liability for certain outside contractors. That
provision states that if the contractor is found liable for
punitive damages, he or she shall be liable to the state for the
full costs incurred in providing representation. This bill has
no comparable provision. The Committee may wish to explore with
the author whether the addition of this limitation may be
appropriate. The Committee may also wish to explore with the
author and sponsor whether the state's assumption of liability
for CSLB outside contractors might more appropriately be
discretionary rather than automatic.
REGISTERED SUPPORT / OPPOSITION :
Support
Contractors State License Board (sponsor)
California Fence Contractors' Association
California Landscape Contractors Association
Engineering Contractors' Association
Flasher Barricade Association
Marin Builders' Association
Opposition
None on file
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334
SB 865
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