What’s a Contractor to do?
So you are a Licensed General Contractor either at the beginning of your career (or near the end thinking of retiring or changing professions). You will perform (or have performed) construction related services - what are your options as a business entity and for insurance in the light of California Code of Civil Procedure C\(CCP) Section 337.15?
CCP § 337.15 states that the time period to sue (statute of limitations) for any Action lawsuit based on a latent defect (not apparent by reasonable inspection) against any person (or Corporation) who develops real property or performs or furnishes the design, specifications, surveying, planning, supervision, testing, or observation of construction or construction of an improvement to real property is ten years. The ten (10) years shall commence upon substantial completion of the improvement, but not later than the date of one of the following, whichever first occurs:
The date of final inspection by the applicable public agency
The date of recordation of a valid notice of completion.
The date of use or occupation of the improvement.
One year after termination or cessation of work on the improvement.
Hypothetically, 3 years have passed since the date of final inspection and you remain concerned about potentially another 7 years of liability based on a latent defect claim lawsuit. What are your options and do they change depending on whether you are an individual, partnership, Limited Liability Company (LLC), or a corporation that entered into the contract to construct.
First and foremost, if you can afford the premiums while in operation, you should be purchasing an "occurrence" based (versus "claims made") policy so that any claim during the ten (10) year period, regardless of when made, is covered by a significant insurance policy. If you purchased a claims made policy (one that only covers claims actually made during the policy term), then at the time of your quitting, retiring, etc., you will want to try and purchase what is called a "tail" policy which covers your earlier work years.
Assuming you are a Corporation, while you are in business, and while dissolving and "winding up" the corporation, you will want to be sure to do certain things so as to maintain the protection provided by your incorporating which prevents an aggrieved party from collecting against you personally. From the very beginning, make sure the company has been properly setup; for example, it has its own taxpayer ID Number and is adequately capitalized. The company should have a separate bank account with sufficient capital to pay the anticipated debts and obligations of the company as a going concern. Make sure never to "co-mingle" funds or pay personal obligations with corporate funds checks. Then, during your operation, make sure to have regular Board and Shareholder meetings. Any time the company enters into a big transaction (buying equipment, entering into a home improvement contract, etc.) you should provide notice as required by the By-Laws, hold meetings, and prepare and sign corporate minutes approving the transaction(s). If you do all this, do not defraud any clients, and abide by the law, then you and your family should be protected from personal liability should any customer try and "pierce the corporate veil" to obtain a judgment against you personally.
Finally, do know that any corporate assets distributed to the shareholders during the dissolution process without payment or adequate provision for payment of corporate liabilities, that the shareholder(s) receiving such funds assets may be held personally liable to the extent of the assets received. CAL. Corporations Code Section 2011(a) and CAL. Civ. Code Sections 1227 and 3439.04.
You may obtain greater protection by selling the business and having the buyer agree to indemnify and defend you in the event of any future lawsuits. This language and provision that requires the buyer to pay for a "tail" would be optimal if they can be obtained in the negotiation process.
What differences are there if instead of a Corporation, you are a Limited Liability Company? Provided the operating agreement or articles of organization do not call for the holding of regular meetings of members or managers, then the failure to hold such meetings cannot be used by a claimant to "pierce the veil" (as with a corporation). Corporations Code Section 17101(b). So the meeting requirements can be lessened and even eliminated with an LLC. However, many professionals cannot be an LLC, so you will need to determine if this entity option is even available for your particular business (General Contractors cannot be an LLC under Corporations Code Sections 17375 and 13401(a).
Lastly, what about a Limited Partnership or General Partnership? In a general partnership, all general partners are vicariously liable for any & all debts of the partnership. Corp. Code 16306(a). Just like a sole proprietorship. The defining characteristic o a Limited Liability Partnership (LLP) is its elimination of the vicarious liability of partners for partnership debts and obligations. Section 16306(c) (but only doctors, lawyers, CPAs can set up an LLP).
Quite often lawyers are consulted after the fact when a lawsuit has been initiated, a claim has been made, and well after a company has been founded. You should obtain the advice of a lawyer from the outset to determine what type of entity would best protect you. If that did not happen when your business was founded, then perhaps now is the time. In addition to advice provided by the lawyer of your choice, also good quality advice from an insurance broker can be very helpful in protecting you and your family.
This article was written by Matt Wertheim. Any distribution or copying of this article is strictly prohibited. The above are Mr. Wertheim's opinions and commentary and should not be relied upon, as the law is constantly changing.
