Is a Contractor With Employees Required to Have Workers Compensation Insurance?

This question was answered in the recent California appellate decision in American Building Innovation LP v. Balfour Beatty Construction, LLC.

As a condition precedent to the issuance, continued maintenance, or reinstatement of a contractor’s license, California law requires applicants and licensees to have on file “at all times” a current and valid certificate of workers’ compensation insurance.

If the applicant or licensee has no employees or is not otherwise subject to workers’ compensation laws, this requirement is inapplicable. 

Failure to obtain or maintain the required coverage results in the automatic and immediate suspension of the contractor’s license by operation of law. 

Such a suspension impacts the contractor’s ability to litigate claims for compensation: a party who was not duly licensed at all times during the performance of its contracting work generally cannot bring or maintain an action to collect compensation for that work. 

A suspended contractor’s license can be retroactively reinstated if the licensee obtains and submits to the registrar a valid certificate of workers’ compensation insurance within 90 days of the certificate’s effective date.

If the certificate is submitted to the registrar more than 90 days after its effective date, however, retroactive reinstatement is available only if the licensee shows that the failure to have a certificate on file was due to circumstances beyond the control of the licensee.

This appeal involved the interplay of these statutes and what circumstances are “beyond the control of the licensee” for purposes of retroactive license reinstatement.

In this case, plaintiff American Building Innovation LP (ABI) had a workers’ compensation policy when it started work on a project.

Its insurer canceled the policy, however, because ABI refused to pay outstanding insurance premiums charged on a prior policy, since ABI believed (correctly as it turns out) it was being overcharged.

As a result of the policy cancellation, ABI’s contractor’s license was suspended mid-project. Fully aware it was unlicensed and uninsured, ABI nevertheless continued its work.

ABI later sued to recover amounts allegedly owed for its work on the project.

Several years into that litigation, ABI settled its old premium dispute with its workers’ compensation insurer and had the canceled policy retroactively reinstated as part of the settlement.

ABI then applied to the Contractors’ State License Board (the Board) for retroactive reinstatement of its contractor’s license, asserting that ABI’s failure to file a certificate of workers’ compensation coverage had been due to circumstances beyond its control, in that the policy had been canceled unbeknownst to ABI.

The Board accepted ABI’s representation and retroactively reinstated its contractor’s license.

The appellate court decided whether ABI was duly licensed at all times during the performance of its work; if not, Bus. & Prof. Code, section 7031 bars ABI from bringing or maintaining the present action to collect the amount owed under the contract.

The appellate court concluded section 7031 bars ABI’s current claims.

A suspended contractor’s license can be retroactively reinstated only if the failure to have a certificate on file was due to circumstances beyond the control of the licensee.

In this case, the lapse in coverage was not beyond ABI’s control. The record demonstrates the policy cancellation occurred because ABI chose not to pay billed insurance premiums.

ABI learned of the policy cancellation days after it took effect, yet ABI did not procure replacement coverage until years later when it settled the premium dispute with its insurer.

The insurer’s retroactive reinstatement of the policy following that settlement was essentially meaningless because it occurred long after the statute of limitations ran on any workers’ compensation claims, rendering the coverage illusory.

In this case, ABI was not entitled to retroactive reinstatement of its license. Because ABI applied for retroactive reinstatement of its license more than 90 days (in this case, nearly three years) after the effective date of the certificate of insurance, the Board could only reinstate the suspended license if the failure to have a certificate on file was due to circumstances beyond the control of ABI.

Here, neither the policy cancellation nor the continued failure to have insurance on file were outside ABI’s control.

In ABI’s request for reinstatement, Vo represented to the Board, under penalty of perjury, that ABI’s lack of workers’ compensation insurance "was beyond my control because unbeknownst to me and [ABI], [State Fund] improperly submitted a cancellation notice to the [Board] for ABI’s February 21, 2017 to February 21, 2018 policy.”

That representation was false. State Fund canceled the 2017-2018 policy effective January 25, 2018, because ABI made a considered decision not to pay the premiums due on the previous policy.

Once the policy was canceled, ABI had a duty to obtain coverage elsewhere if it intended to continue to work on Balfour Beatty’s project.

It failed to do so. Instead, it falsely represented to the Board, under penalty of perjury, that ABI was exempt from workers’ compensation insurance requirements because it had no employees.

When it elected not to pay the premium due or procure workers’ compensation insurance elsewhere, ABI compromised the safety and security of its workers. It was not until over two years later, when faced with Defendants’ motion for summary judgment, that ABI agreed to pay the 2015-2016 policy premium so that its 2017-2018 policy would be retroactively reinstated.

ABI has not shown its lapse in workers’ compensation coverage “was due to circumstances beyond [its] control.”

The Board, therefore, lacked the power to reinstate ABI’s suspended license retroactively.

That in turn means ABI was not “duly licensed . . . at all times during the performance of” its work.

Accordingly, section 7031 bared ABI from bringing or maintaining the present action against Balfour Beatty to collect compensation for its work on the project, “regardless of the merits of [ABI’s] cause of action” against Balfour Beatty. 

Citing the Eighth Amendment to the United States Constitution, ABI maintained the application of section 7031 is unconstitutional in that it arbitrarily and excessively punished ABI by precluding any recovery for its work.

The legitimacy of the public policies underlying California’s licensing laws and the validity of section 7031 are well established.

As the California Supreme Court has observed, California’s licensing laws are intended “to protect the public from incompetence and dishonesty in those who provide building and construction services,” and the “licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business.”

Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay.

Because of the strength and clarity of this policy, it is well settled that section 7031 applies despite injustice to the unlicensed contractor. Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.

The result is “a stiff all-or-nothing penalty for unlicensed work.”

The statute itself specifies that it applies regardless of the merits of the cause of action brought by the plaintiff, and its harsh results are justified by the importance of deterring violations of the licensing requirements.

LESSONS:

1.         As a condition precedent to the issuance, continued maintenance, or reinstatement of a contractor’s license, California law requires applicants and licensees to have on file “at all times” a current and valid certificate of workers’ compensation insurance.

2.         If the applicant or licensee has no employees or is not otherwise subject to workers’ compensation laws, this requirement is inapplicable. 

3.         Failure to obtain or maintain the required coverage results in the automatic and immediate suspension of the contractor’s license by operation of law. 

4.         A suspended contractor’s license can be retroactively reinstated only if the failure to have a certificate on file was due to circumstances beyond the control of the licensee.