California Surplus Lines: LLC Bill Thriving

Among a horde of bills wending its way through California’s Legislature, there’s an innocuous looking bill with simple language to change a few words in existing law that could have a great deal of meaning to those in the surplus lines business.

Assembly Bill 1236, by Curt Hagman, R- Chino Hills, which has the strong support of the Surplus Line Association of California, makes a technical change to existing law that its supporters say is necessary to ensure adequate availability of insurance to Limited Liability Companies that obtain a contractor’s license.

The bill is thriving so far, having went through Assembly unopposed, and is now in state Senate.

State law currently requires such licensees to obtain general liability insurance and to get the insurance through an admitted insurance carrier. The bill would additionally permit those policies to be written by an eligible surplus lines insurer.

“We do not dispute the requirement of the insurance but the requirement that the insurance must be underwritten by an admitted carrier is limiting in the marketplace and counter to the overarching insurance convention developed in California over many decades,” states a letter from SLAC supporting the legislation.

In 2010, a section of the state’s Business and Professions Code was amended to allow an LLC to render contractors services that are “professional services” by authorizing the issuance of a contractor’ s license to the company.

In accordance with the provisions of the amended section, an LLC must maintain insurance against liability for damages arising out of claims written by an insurer or insurers duly licensed by this state. But the requirement that the insurance be written by an admitted insurer limits the benefit of this law, according to the SLA.

Property/casualty insurance typically must be placed in the admitted market if the admitted market is willing to underwrite it, but if there is no admitted market consumers are allowed to obtain their insurance from the surplus line market in most cases, argued Benjamin J McKay, SLAC’s executive director.

Those who fit in this category are “typically, new industries that don’t have a loss history, unique risks that can’t be easily underwritten en mass, or on high capacity projects – think huge construction projects,” he said. “Often, large projects will have both admitted and non-admitted policies for various aspects of the project.”

SLAC believes the bill would bring the insuring of LLC contractors in line with insurance currently available to non-LLC contractors. It will also protect the public by making quality insurance products available to these contractors and should help promote the growth of this important sector of our economy, according to the group.

It’s hard to say how much business those in the surplus lines arena lost in the last few years, but McKay has heard from several members and contractors who have had difficulty because of the law.

“I have had several wholesale brokers tell me that they could not place a deal because of this law,” he said. “Anecdotally, it seems the law has stalled business and increased cost of compliance, as contractors are forced to incorporate in a new form or not do business as a contractor.”

But the heart of the matter is the surplus market is often misunderstood by lawmakers, McKay said.

“Our members, colleagues, consultants, and I explain and clarify the surplus line market to legislators, regulators, and citizens, routinely,” he said. “It is very important that decision-makers at every level of government and in every branch understand our business. Only through a full understanding of our business can they promulgate the proper policies and regulate the business effectively.”

McKay also expressed confidence the bill will make it out of Senate and head to the governor for his signature.

“It is a very common sense bill, as reflected by its unanimous passage in the House,” McKay said. “I am cautiously optimistic that the legislation will pass.”

Topics California Legislation Excess Surplus Contractors