BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Joseph L. Dunn, Chair
2005-2006 Regular Session
AB 180 A
Assembly Member J. Horton B
As Amended July 5, 2005
Hearing Date: July 12, 2005 1
Business and Professions Code; Corporations Code 8
GMO 0
SUBJECT
Limited Liability Partnerships: Engineers and Land
Surveyors
DESCRIPTION
This bill would permit engineers and land surveyors to
limit their partnership tort and contractual liability by
operating as a limited liability partnership when the
partnership meets specified insurance requirements. The
insurance requirement for an engineer and land surveyor
LLP would be $1,000,000 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.
BACKGROUND
Under the Beverly-Killea Limited Liability Company (LLC)
Act, a foreign or domestic limited liability company 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.
The rationale for the exclusion was that service providers
(more)
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who harm others by their misconduct, incompetence or
negligence should not be able to limit their liability by
operating as a LLC or limited liability partnership (LLP)
and thus become potentially judgment-proof.
When service providers operate in a partnership, such as a
law firm, the personal assets of a general partner is
liable for any judgment that is not payable by the
partnership based upon the rationale of joint and several
partnership liability as well as notions of fairness. If
general partners personally profit when the partnership
profits are distributed, they should remain personally
liable for any judgment against the partnership which the
partnership assets are not sufficient to pay. Otherwise,
general partnerships could avoid paying liability judgments
by distributing its assets to its partners, leaving only
modest assets in the partnership account.
A limited liability partnership would enable the partners
to share in the profits of the partnership, but avoid the
joint and several liability of a partnership. For
liability purposes, partners in a LLP would have no
personal liability for the torts of the partnership and
stand to lose only the amount he or she has contributed or
is obligated to contribute under the terms of the
partnership agreement. In both settings the LLP and
general partnership setting, the individual wrongdoing
partner would be personally liable for his or her tort.
In California, registered LLPs and foreign LLPs may only be
formed for the practice of law, the practice of
accountancy, and, until January 1, 2007, the practice of
architecture. AB 1265 (Benoit, 2003) would have authorized
engineers and land surveyors to form limited liability
partnerships under the same conditions and insurance
requirements as architects. AB 1265 was held by this
committee pending an interim study.
This bill would authorize limited liability partnerships
for the practice of engineering or land surveying until
January 1, 2013, under the same conditions as architects
and accountants, except that the insurance requirements
would be slightly higher for engineers and land surveyor
LLPs.
AB 180 (Jerome Horton)
Page 3
CHANGES TO EXISTING LAW
Existing law provides for the formation of various types of
legal entities, including corporations, limited liability
companies, partnerships, limited partnerships, and limited
liability partnerships. Under existing law , registered
limited liability partnerships (LLP) may be formed for the
practice of accountancy or law if the LLP carries specified
minimum levels of insurance. Until January 1, 2007,
architect firms may also operate as a LLP if they meet
specified insurance requirements. (Corporations Code
Section 16956.)
Existing law generally requires a LLP to purchase and
maintain at least $500,000 of liability insurance for the
operational year to cover claims for damages against the
LLP. For each additional service provider in the LLP above
five, additional insurance of $100,000 is required, up to a
maximum of $5 million in the case of accountants and
architects, and up to a maximum of $7.5 million in the case
of lawyers. In the event that specified minimum insurance
coverage is depleted or reduced during the operational year
by payment of defense costs and claims settlement, the LLP
is not required to acquire additional insurance coverage
during the operational year. Existing law also allows a
LLP to maintain in trust or bank escrow, cash, bank
certificates of deposits, U.S. Treasury obligations, or
bank letters of credit in the required amount as security
for payment of tort or contract liabilities in lieu of the
insurance coverage.
This bill would authorize registered civil, mechanical or
electrical engineers and licensed land surveyors to operate
as a limited liability partnership (LLP) under the same
conditions for architects, except that the insurance
coverage requirements would be $100,000 per partner, but no
less than $1 million, and a maximum requirement of $ 5
million insurance coverage.
This bill contains a sunset date of January 1, 2013.
COMMENT
1. Stated need for the bill
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AB 180, like AB 1265 (Benoit, 2003) that would have
permitted engineers and land surveyors to operate as LLPs
in California, is sponsored by the Consulting Engineers
and Land Surveyors of California (CELSOC). CELSOC argues
that engineers and land surveyors should be able to
operate as a limited liability partnership (LLP) and
benefit from its favorable tax and liability advantages,
in the same manner as architects, attorneys and
accountants.
AB 1265 was held in this committee based on the
Committee's desire to study the adequacy or inadequacy of
the insurance requirements applicable to architect LLPs
that would have applied to engineer and land surveyor
LLPs.
This bill would raise the minimum insurance coverage
requirement for engineer and land surveyor LLPs from
$500,000 (currently applicable to architects and
accountants) to $1,000,000.
As with AB 1265, the critical issue is whether or not the
insurance coverage requirements that would apply to LLPs
of engineers and land surveyors under AB 180 would be
sufficient to ensure that injured parties are able to
collect damages.
2. Proposed levels of insurance coverage would likely result
in some victims receiving less than full recovery
As a condition of operating as a LLP, AB 180 would
require an engineer and land surveyor LLP to maintain
liability insurance of at least $1,000,000 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
$1,000,000 of insurance and a ten-person firm would be
required to carry the same minimum $1 million in
coverage. Beyond that, each additional partner would
require an additional $100,000 in coverage for the LLP,
up to a maximum requirement of $5 million. Associates
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would not require additional insurance.
The rationale behind the insurance requirement is to
ensure that a person who is injured by a LLP is able to
collect his or her judgment. Because of the limited
liability attributes of a LLP, the injured person can no
longer rely on the joint and several liability of the
partners and their personal assets, but must look to the
assets of the LLP. To ensure adequate but not
necessarily complete recovery, an insurance requirement
has been added in the few situations that service
providers (currently limited to accountants, attorneys
and architects) are permitted to operate as a LLP. Thus,
even if the LLP has few assets because the profits are
regularly distributed to its members, the required
insurance is available to pay contract and tort damages.
At issue then is whether the proposed insurance
requirements will be adequate to cover most claims
against engineers or land surveyors for professional
negligence so that an injured party does not go
uncompensated because the business is operating as a LLP.
Although the sponsor of the bill has provided some
claims data to bolster their argument that the proposed
insurance levels are enough to cover the average claims
made over the last ten years, no facts are yet available
regarding claims that have been or could be made as a
result of this year's spate of landslides in Southern
California that caused numerous homes to slide down hills
and embankments, resulting in numerous personal injuries
and death.
a) Proposed level may decrease insurance coverages
purchased
According to insurance and claims data summarized by
CELSOC and provided to committee staff, 21.4% of the
policies are for $500,000 or less, 64.37% are for $1
million, 12.68% are for $2 million, and 1.54% purchase
over $2 million in insurance. Only 0.59% of the
policies are $5 million, with the largest standard
policy limits in California being $10 million. CELSOC
also states that the over 70% of engineering firms
earn less than $1 million of gross revenue per year,
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and that 20.12% earn $1 million to $3 million.
Under this bill, however, an engineering firm need buy
only $1 million in insurance to obtain limited
liability partnership protection if the firm had ten
or fewer partners/engineers. As noted, non-partner
associates do not impose an insurance requirement. As
in the failed bill also sponsored by CELSOC last year
(AB 1265) no information was provided regarding the
size of these firms. Thus, it is conceivable that
many firms that now buy $2 million or more of
insurance could drop down and purchase the bare
minimum required by law. This would still be at least
35% of the firms surveyed by CELSOC.
CELSOC responds that firms will likely continue to buy
the higher levels of insurance because of job
requirements. It writes: "?most of the clients who
contract directly with engineers are business
entities, not individual consumers. These clients
will understand risk and require that the engineer
provide adequate insurance for the project being
undertaken - regardless of the statutory
requirements."
However, in the absence of that condition, which may
or may not be a prevalent practice in smaller
projects, many firms may find the option of dropping
down in insurance and saving costs to be a very
attractive option, particularly if the lower level of
insurance does not expose them to any liability.
WOULD NOT THIS BILL RESULT IN SOME FIRMS LOWERING
THEIR INSURANCE COVERAGES, WITH THE RESULT THAT SOME
INJURED CONSUMERS WILL NOT BE ABLE TO ACHIEVE AN
ADEQUATE RECOVERY?
b) Proposed level of insurance would have been
inadequate to cover the largest claims paid in 5 of
the last 10 years
According to the provided data, the highest claims
paid in 5 of the last 10 years surveyed exceeded
$1,000,000. The highest were $3.5 million in 2002,
$1.45 million in 1995, $1.15 million in 1994,
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$1,100,000 in 2003, and $1,086,500 in 1998. There is
no data available for claims resulting from last
year's disasters involving landslides in Southern
California.
Data showing the frequency of such high payouts was
requested but denied by all but one insurer on the
grounds such information is proprietary. That one
insurer, representing about 40% of the market,
indicated that in the past 5 years, 1 claim exceeded
$1.5 million (but did not indicate by how much), 2
claims were within the $1 million to $1.25 range, and
2 were within the $500,000 to $1 million range (out of
234 claims). The largest insurer, who would not
provide detailed data, reports: "Claims over $1 M
typically represent less than 2% of our claims with
actual indemnity payments, and closer to .50% of all
claims made."
While AB 180 would require the minimum insurance level
of $1 million, that threshold was still exceeded in
1994, 1995, 1998, 2002, and 2003.
WOULD NOT THIS BILL RESULT IN SOME INJURED PARTIES
BEING UNABLE TO COLLECT THEIR JUDGMENTS FROM ENGINEER
AND LAND SURVEYING FIRMS OPERATING AS LLPS?
Moreover, because the LLP law uniquely does not
require the policy to be replenished during the course
of the operational year, payment of an average claim
and its defense costs could reduce the available
insurance for the year to around $300,000.
SHOULD ENGINEER AND LAND SURVEYING FIRMS BE REQUIRED
TO REPLENISH ITS AVAILABLE INSURANCE COVERAGE UPON
PAYMENT OF CLAIMS MADE AND DEFENSE COSTS IF THIS BILL
PASSES?
CELSOC asserts that the arguments they made in
sponsoring AB 1265 of last year would still apply to
AB 180. It states that "[the bill] strikes a balance
by setting insurance minimums high enough to
automatically cover 97% of the claims history for the
profession without setting a limit that many small
businesses might not need or be able to afford."
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The policy question thus remains as to whether the $1
million of minimum insurance coverage is sufficient to
protect potential parties injured by the negligence of
an engineer or land surveyor. While a three or four
or even six person firm may be small in scale, nothing
in the law limits the size of their projects or the
scale of their negligence. Conceivably, an engineer
in a small firm can cause millions in property damage
and personal injury losses by his negligence, which
his personal assets cannot cover, and the LLP's
liability would be limited to the statutory $1
million. The other partners would not be jointly and
severally liable for any shortfall in the recovery, as
they would be under general partnership law.
To this, CELSOC replies: "According to the major
insurers of architects and engineers in California,
there is simply no correlation between the number of
employees and the size of the risk and thus necessary
insurance. The key factors are the risk of the
project and practice area, the size of the project and
the experience of the engineer or architect. These
factors are not taken into account by existing law,
which simply requires insurance based upon the number
of employees."
However, in light of the major disasters involving
landslides in the past year, it would make eminent
sense to update the claims data before any assumptions
are made regarding the adequacy of the insurance
provisions of AB 180.
SHOULD THIS BILL AWAIT THE CLAIMS DATA FROM THIS
YEAR'S MAJOR DISASTERS INVOLVING LANDSLIDES?
3.Other pending measure also proposes limited liability
Existing law provides that the architects' ability to
operate as LLPs in the state will sunset on January 1,
2007. A review is likely to occur next year to explore
whether the insurance limits (now at $500,000 minimum)
was sufficient to cover claims during the time that the
statute has been in place. In the meantime, AB 180 and
another bill, AB 242 (Vargas) are attempting to limit
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liability for engineers and surveyors and for
underwritten title companies, respectively. AB 242
proposes to allow underwritten title companies to operate
as limited liability companies, with no insurance
requirements.
4. Sunset provision
Should this bill be enacted, it would sunset on January
1, 2013, a period of eight years that engineers and land
surveyors would be permitted to operate as LLPs. The
authority last given to architects to operate as an LLP
spans only five years, and is due to expire on January 1,
2007.
IF THIS BILL PASSES, SHOULD THE BILL SUNSET IN FIVE
YEARS?
Support: None Known
Opposition: None Known
HISTORY
Source: Consulting Engineers and Land Surveyors of
California (CELSOC)
Related Pending Legislation: AB 242 (Vargas). See Comment
3.
Prior Legislation: AB 1265 (Benoit, 2004) was identical to
AB 180, except it would have required the
minimum $500,000 insurance coverage
currently required for architects. The
bill failed passage in this committee.
AB 2261 (Parra, 2004) would have allowed
real estate brokers to operate as LLPs.,
provided the LLP met insurance
requirements for architects. The bill was
held in this committee.
AB 1962 (Cox, 20004) would have allowed
underwritten title companies to operate as
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limited liability companies, without any
insurance requirements. The bill was held
in this committee.
Prior Vote:Asm. B. & P. (Ayes 8, Noes 1)
Asm. B. & F. (Ayes 7, Noes 0)
Asm. Appr. (Ayes (16, Noes 1)
Asm. Flr. (Ayes 73, Noes 1)
Sen. B.,P. & E.D. (Ayes 4, Noes 0)
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