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Increased Reporting Requirements for Contractors - Even if All Claims Are Settled

Client Alert

Authors: Raina L. Richter and Ryan R. Deroo

January 2019
Increased Reporting Requirements for Contractors - Even if All Claims Are Settled

This article was published in the January 2019 issue of AGC Law in Brief (Volume 5, Issue 1), Practical Construction Law & Risk Issues. It is reprinted here with permission.

For most professionally licensed groups, reporting requirements are the norm, not the exception. In fact, it is commonplace for boards to require licensees to report judgments, settlements and convictions that may reveal potential patterns and problems with a licensee. See Ed Howard, SB 465 (Hill) – Support, Center for Public Interest Law, University of San Diego (July 7, 2015). This is true for architects, engineers, physicians and accountants, which to varying extents, are all required to report settlements and awards relating to their professional practice. Id. at 3. By contrast, reporting requirements for contractors are fairly uncommon. But that does not mean they are nonexistent, and contractors must be cognizant of state-specific reporting requirements — even if all claims are settled.

California is a prime example of why contractors, and their attorneys, must remain up to date; new reporting requirements for residential contractors begin this year. In August 2018, California implemented Senate Bill 1465, which added sections 7071.20, 7071.21 and 7071.22 to the Business and Professions Code. These sections require reporting within 90 days of final judgments, settlement agreements or final arbitration awards in which the licensee is named as a defendant or cross-defendant filed after January 1, 2019, if, among other things, the amount is $1 million or greater and the action is a result of a claim for damages regarding a failure or potential failure of the “load bearing portions of a multifamily residential unit.” See §7071.20, subd. (a). For complex multiparty litigation in California, this reporting requirement applies to all contractors involved as long as their respective liability is in excess of $15,000. 

Oregon has also adopted reporting requirements, and contractors must report final judgments if the balance is not paid within 30 days. See §701.109. Although the statutes of both California and Oregon are relatively specific, and at present, no other states have similar requirements, contractors must remain abreast of industry changes. With California’s new law, failure of a licensee to report to the registrar in the time and manner required is grounds for disciplinary action, which could threaten a contractor’s licensure status. See §7071.20, subd. (f). This article will analyze the driving forces behind California’s recent legislation and discuss the varying factors states must consider if they implement similar requirements.

California Senate Bill 1465

Prompting California’s recent legislation was the tragic Berkeley balcony collapse, which resulted in the death of six students and critically injured seven others. After the collapse, news reports revealed that the company that constructed the apartment complex had paid $26.5 million in construction defect settlements in the previous three years. See Robert Reichel, CA State Senator Hill Proposes Contractor’s Bill, Patch (Apr. 18, 2018). In response, California passed Senate Bill 465, which required the Contractors State License Board (CSLB) to prepare a study to determine whether “the board’s ability to protect the public . . . would be enhanced by regulations requiring licensees to report judgments, arbitration awards, or settlement payments of construction defect claims for residential units.” Senate Bill 465 (Hill) Study, Contractors State License Board (Dec. 2017). As evidenced by the recent legislation, the CSLB determined reporting requirements would enhance public safety, and, as a result, Senate Bill 1465 came to fruition.

The conclusion that reporting requirements should be implemented for contractors echoes what commentators have described as the fundamental purpose of licensure: public safety. See Ed Howard, SB 465 (Hill) – Support, at 2. Because licensure disrupts the market by restraining the number of people who may enter a profession, it is only warranted for those professions that, if practiced incompetently or dishonestly, injure consumers or patients. See id. Thus, the purpose behind disciplinary action for licensees is not punishment, but rather the protection of future consumers. See, e.g., Senate Bill 465 (Hill) Study, at 2 (“protection of the public shall be the highest priority”). With this overarching goal in mind, the CSLB weighed a number of considerations in determining whether to recommend that contractors should be required to report settlements.

Considerations When Implementing Reporting Requirements

One of the primary concerns when implementing reporting requirements is drawing the line between reporting and discipline. In California, only 11 percent of architects who report settlements or judgments are disciplined; for engineers, that number is 15 percent. Although these percentages may seem low, they are consistent with the purpose behind the reporting requirements. Both boards highlight that reporting is (i) solely a consumer protection tool for the public good and (ii) that the emphasis to licensees is that the intent is not to be a clearinghouse for how many lawsuits they have. Id. at 33. Moreover, before any discipline can be handed down, a board must conduct its own investigation. This presents two distinct challenges that must be addressed before implementing similar legislation.

First, licensing boards must address the standard of proof required for disciplinary action. In general, claims against contractors are primarily civil actions, where the burden of proof is “preponderance of the evidence.” But in order for the CSLB to discipline one of its licensees, it must establish the violation by a showing of “clear and convincing evidence,” a much stricter standard. This requires licensing boards to allocate resources for investigations, even if a contractor was found liable in an arbitration/hearing. As the CSLB notes, reporting does not identify licensees who are “subject to” an enforcement action; it simply provides information on potential violations, which, if substantiated, may lead to disciplinary action.

Second, when instituting reporting requirements, licensing boards must address the statute of limitations for disciplinary action. If the statute of limitations is too short, the board may learn about violations after it is powerless to penalize. This is somewhat counterintuitive, considering the overarching goal of public safety. Take California for example, where the statute of limitations to investigate a complaint is either four or 10 years and runs from the time the act or omission occurred. As one attorney noted, the majority of apartment buildings that have a catastrophic failure are likely constructed more than 10 years before the failure. Id. at 23. Moreover, parties are often tied up in litigation for years, especially when pursuing high-dollar-value claims, further delaying the time at which reports are received by the board. Although the CSLB still concluded that settlement reporting would be beneficial, future legislation should take this into consideration.

There is also a question of confidentiality. As noted by the CSLB, “when insurance companies pay out tens of millions of dollars for construction defect claims, they require a full and complete release . . . as well as strict confidentiality.” Id. at 9. While strict confidentiality provisions may be overridden by legislation requiring disclosure, states must be mindful of striking a balance. Whether settlement information is made available only to the board, or potentially to the public, could have widespread implications. As some commentators have noted, any reporting requirement could potentially chill a contractor’s willingness to settle claims out of fear it could be viewed as an admission of wrongdoing. Id. at 39. Yet the lack of reporting leaves licensing boards largely in the dark, especially considering that the CSLB’s study found that 95 percent of defect cases settle. Again, this is something that licensing boards and legislatures will need to balance if they consider drafting regulations of their own.

Conclusion

Despite the various considerations surrounding contractor reporting requirements, perhaps the most interesting finding came as a result of an industry survey. A majority of those surveyed — 54 percent of licensees, 63 percent of insurers and 96 percent of consumers — supported a reporting requirement. Id. at 37-38. If both industry professionals and consumers generally support increased disclosure, it should not come as a surprise if additional states begin considering this type of legislation. And while most contractors need not worry just yet, it is not unrealistic to think similar laws could be passed in the near future. In the end, responsibility rests with both sides. Licensing boards must work with industry professionals if they hope to formulate effective laws, and contractors must stay abreast of potential legislation so they can comply with their professional duties. This final point is especially salient for lawyers and in-house counsel who handle construction litigation — even if a contractor or design professional settles, they must be aware of potential reporting requirements.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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