CALIFORNIA CHANGES LAW TO ALLOW CONTRACTORS TO OPERATE AS LLCs and ENGINEERS AND LAND SURVEYORS AS LLPS

On September 30, 2010, Governor Schwarzenegger signed SB 392, which will permit the California State Contractors License Board to issue contractors licenses to limited liability companies no later than January 1, 2012.  As with other professionals who organize as LLCs or limited liability partnerships (“LLPs”), an LLC holding a contractors license will be required to maintain a minimal level of security for consumer claims. 

Security (Insurance) Requirements.  The security can be satisfied through insurance, as set forth below:

1.         For LLCs with five or fewer persons listed on the “members of the personnel of record,” the aggregate
minimum insurance will not be less than $1 million.
2.         For LLCs with more than five members listed on the “members of the personnel of record,” an additional $100,000
of insurance shall be obtained for each person listed on the personnel of record of the licensee, not to exceed
$5 million.

The policies of insurance may be issued on a claims-made basis or on occurrence basis and shall cover:  (1) in the case of claims-made policy, claims initially asserted in the designated period; and (2) in the case of an occurrence policy, occurrences during the designated period.  A designated period means a policy year, or any other period not greater than 12 months.  All policies of insurance must be issued by an insurer licensed to do business in California and may be in the form reasonably available in the commercial insurance markets, subject to the terms, conditions, exclusions and endorsements typically contained in those policies.

The impairment or exhaustion of the aggregate limit of liability by the amounts paid under any policy in connection with settlement discharge or defense of claims applicable to a designated period shall not require the licensee to acquire additional insurance for that period.  However, the aggregate limited liability coverage (coverage limit) required by California law shall be reinstated not later than the commencement date of the next designated period and the license of any licensee that fails to comply with this requirement will be suspended.  Upon dissolution and winding up of the LLC, the LLC must maintain or obtain an extended reporting period endorsement or the equivalent thereof, equaling or exceeding the aggregate amount of liability for a minimum of three years if reasonably available from the insurer.

For any insurance policy secured by a licensee, a certificate of liability insurance signed by an authorized agent or employee of the insured must be submitted electronically or otherwise to the State Contractor’s License Board.  The issuer must report the following information:  Name of the Licensee, License Number, Policy Number, dates that the coverage is scheduled to commence and lapse, the date and amount of any payments and the cancellation date, if any.

Management Licensing Requirement.  The LLC must also have a responsible managing officer, responsible managing manager, responsible managing member, or responsible managing employee who holds a contractor’s license.

Surety Bond Requirement.  Finally, the LLC must have a surety bond in the sum of $100,000 executed by the manager and made in favor the State of California .  If an LLC licensed to do business in California fails to register with the Secretary of State and maintain good standing, it will have its license revoked within 30 days notice by the Secretary of State.  After the license is suspended, each officer, manager, responsible managing employee, responsible managing member, responsible managing officer or person of record is personally liable for up to $1 million of damages to third parties in connection with the company’s performance during the period of suspension.

ENGINEERS AND LAND SURVEYORS TO BE ALLOWED TO OPERATE AS LLPs

SB 1008 authorizes professional engineers and land surveyors to conduct business as limited liability partnership (LLPs).  Similar to attorneys, accountants and architects, they would be required to maintain errors and omissions insurance equal to $1,000,000 if the firm has 5 or fewer licensed persons.  Each additional licensed person would increase the insurance by $100,000 not to exceed $5,000,000.  The insurance would need to be on a claims-made or occurrence basis.