As part of the long-term response to the June 2015 collapse of an apartment building balcony in Berkeley, California which killed six young people, California Governor Jerry Brown signed into a law Senate Bill 1465, which requires contractors, subcontractors and insurers to report most settlements reached in construction defect cases. This new law took effect on January 1, 2019 and should be on the radar of California general contractors, subcontractors and their insurers.
Mandatory Reporting to Contractor’s State License Board In Effect
Following the Berkeley accident, it was discovered that the general contractor which built the involved apartment complex had paid over $26 million in construction defect case settlements during the three years preceding the accident. As a means to alert the Contractor’s State License Board (“CSLB”) of significant defect settlements and the potential need to investigate involved contractors, the new law requires building contractors to report to the CSLB any settlement for $1 million or more which was paid in response to a claim of defects in a multifamily rental residential structure and which involved:
- Allegations of fraud, deceit, negligence, breach of contract, express or implied warranty, misrepresentation, incompetence, recklessness, wrongful death or strict liability by the act or omission of a licensee;
- A claim for damages to a property or a person that allegedly resulted in a failure, or a condition that would pose a substantial risk of a failure, in load-bearing portions of a multifamily rental residential structure;
- A claim for damages to a property or a person that was allegedly caused by a licensee’s construction, repair, alteration to, subtraction from, improvement of, moving, wrecking, or demolishing of, any part of a multifamily rental residential structure.
The new law requires a general contractor licensed with the CSLB to “report to the registrar in writing within 90 days after the licensee has knowledge of any civil action resulting in a final judgment, executed settlement agreement, or final arbitration award in which the licensee is named as a defendant or cross-defendant, filed on or after January 1, 2019,” which meets the additional criteria listed above and which exceeds $1 million.
Although the law expressly mentions general contractors, subcontractors who perform limited scopes of work on rental residential projects are not exempt from the CSLB reporting requirements. In complex actions involving multiple parties, each party who is assigned a judgment, or who agrees to pay via settlement, at least $15,000.00 must also report the settlement to the CSLB.
The New Reporting Requirement Applies to Insurers
Significantly, not only are contractors and subcontractors required to comply with the above requirements, but insurers who issue general liability, construction defect and/or professional liability policies to parties who contribute to residential rental projects and who are assigned or agree to contribution which requires disclosure are also required to notify the CSLB of those payments made on behalf of their insureds.
Contractors and subcontractors are required to report qualifying settlements within 90 days of “final judgment” of actions following verdict or settlement and insurers are required to report qualifying payments within 30 days after issuing payment. Pursuant to terms of the new law, the CSLB is authorized to craft additional related procedures, including those related to enforcement.
The new judgment/settlement disclosure requirements are set forth in California Business and Professions Code Sections 7071.20, 7071.21 and 7071.22. Although the statutes impose new requirements on contractors and their insurers, similar disclosure requirements are already in place for architects, engineers and land surveyors in California. Therefore, these requirements are not entirely unknown in the building industry. The new statutes simply extend similar requirements previously imposed on design professionals to the contractors and subcontractors who build residential rental projects and to their insurers.
Attorneys should be prepared to advise their contractor, subcontractor, and insurer clients about these new disclosure requirements. We will monitor the use and enforcement of these new laws and provide updates in the future.