Big Brother Is Watching! The Self-Reporting Requirements For Architects In California
Warning: your civil settlements are being watched and scrutinized by the California Architects Board (CAB). California Business and Professions Code Sections 5588 and 5589 require architects and their professional liability insurers to report to the CAB a settlement or arbitration award exceeding $5,000 that involves a claim or action alleging that an architect has engaged in wrongful conduct, including negligence and incompetency. A simple allegation and payment thereafter of $5,000 or more is all that is necessary to trigger the reporting requirement.
The History of the Reporting Requirement
The California Business and Professions Code Sections 5500 to 5610.7 govern thepractice of architecture. In 1979, the Legislature amended the Architects Practice Act to include Business and Professions Code Sections 5588 and 5589. These sections require that a report be filed with the CAB whenever a claim that was premised on a licensed architect’s alleged “fraud, deceit, negligence, incompetency, or recklessness” resulted in a settlement or arbitration award of $5,000 or more. The sections were added, as a public policy response to allegedly make architect’s more responsible for the services they provide.
As the law currently exists, sections 5588 and 5589 authorize the CAB to investigate the actions of any architect upon its own motion, and to suspend or revoke the license of any architect who is guilty of, or commits one or more of the acts or omissions constituting grounds for disciplinary action. Additionally, it requires that every settlement or arbitration award in excess of $5,000 for an alleged claim or action be reported to the CAB by the licensee and his or her professional liability insurer. Finally, and most importantly, it specifies that it shall be a misdemeanor punishable by a fine of not less than $100 or more than $1,000 if the licensee does not report the settlement or arbitration award, and by a fine of not less than $10,000 or more than $100,000 for intentional non-reporting by the licensee.
It is important to note that CAB only investigates licensed architects pursuant to the California Business and Professions Code. Individuals obtain licenses, not architectural firms. Therefore, architectural firms will not be investigated.
Since 1979 and until just recently, the CAB has rarely enforced the reporting requirement. Additionally, insurance carriers have rarely reported to the CAB because, as initially interpreted, the law clearly limited the parameters of notification to matters actually caused by the architect’s fault. Since most claims are settled with no admission of fault, reports by insurance companies were historically minimal. However, starting fairly recently, the CAB made it very clear that it was intending to undertake a major effort to force compliance by architects and their insurers. The CAB’s position has been clarified by a recent Attorney General opinion.
Recent Opinion from the Attorney General and Resulting Fallout
On August 26, 2004, Attorney General Bill Lockyer issued Opinion 03-1102. While opinions of the Attorney General are not technically binding under California law, the CAB and the courts usually give them significant weight, especially where as here, there is an absence of any reported decisions from the California Court of Appeals. More importantly, the CAB will take the position that the decision supports its interpretation of the law.
Opinion 03-1102 concluded that sections 5588 and 5589 require notification of any settlement or award exceeding $5,000 regardless of whether there is any actual finding or admission of fault. As long as the settlement involves a claim or action alleging wrongful conduct, the insurer and the architect must report. As a direct consequence, professional liability insurance companies have been put on notice that they must notify the CAB of all settlements. Additionally, the Opinion concludes that a “settlement” is any agreement resolving all or part of a demand for money that is based upon an architect’s wrongful conduct. This is a very broad conclusion and likely requires reporting for many different activities. It may even include such things as settlements regarding change order claims, compromises on fees owed, etc.
Present Issues
How do I report?
The code sections do not provide for instructions on how to report. In a recent telephone conversation with the CAB, they laid out the simple procedure for reporting. Sending a copy of the settlement agreement is usually all that is needed to satisfy the reporting requirement. The CAB may thereafter request a copy of the complaint if a lawsuit was filed. If requested, the CAB will provide you with a two-page form to fill out regarding the details of the settlement. Filling out the form will also satisfy the reporting requirement. A copy of the current reporting form is attached to this article.
What is the investigation process after reporting a settlement?
Depending on the circumstances, the CAB will sometimes call the architect after receiving the settlement information. Additionally, the CAB may call other parties involved in the project, such as a general contractor or owner, to obtain additional information. The CAB will then determine if it needs to investigate the matter further to determine if any violations of the Business and Professions Code have occurred. Once the investigation has been completed, the CAB is supposed to issue a final disposition to the architect via written correspondence.
What penalties can be assessed by the CAB?
Currently there are no firm standards as to how the CAB will enforce the code sections and what types of penalties it will impose. Therefore, there are no guarantees as to what to expect. After the CAB receives the report, they decide if and how the report should be investigated.
The CAB has stated that they will look at the nature of the conduct and the amount of the settlement when investigating the claim. They understand that many matters are settled to save the costs that many occur with litigation. The CAB will likely be more stringent on claims involving intentional acts such as fraud and deceit.
The penalties can range from a warning, to a citation, to an investigation of one’s license for the most egregious acts. The CAB states that most investigations do not result in penalties. Additionally, the CAB states that only a few matters have resulted in a citation and that no direct disciplinary action has resulted from any investigation to date.
What if you don’t report?
As discussed above, failing to report to the CAB could result in substantial monetary penalties. The CAB could issue a fine from $100-$1,000 if it finds you unknowingly failed to report. Additionally, if the CAB determines you intentionally failed to report, a fine between $10,000-$100,000 could be issued. A dangerous situation can arise and the CAB may determine you intentionally failed to report if it does not receive a report from you, but does receive a report from your professional liability carrier. Therefore, it is important to communicate with your insurer on this important issue when settling claims.
Now that the Attorney General Opinion has more specifically defined sections 5588 and 5589, will the CAB begin digging up old settled claims and actions?
This seems to be the case. A number of architects have reported situations where a long dead matter has been resurrected. In one recent situation, the CAB contacted a homeowner who sensed he could take a shot at his Architect years after the disputed claim was settled. He went to great lengths to inform the CAB about how terrible the Architect had performed. Thankfully, the Architect was not penalized nor was any disciplinary action taken.
Officials at the CAB have advised that they only have two employees to receive and analyze current reports. Based on the Attorney General Opinion, it is likely that these individuals will be receiving a large increase in reports and it is uncertain how much action the CAB will be able to take on current, let alone old, matters.
Is pushing to raise the dollar limit a viable solution?
Sections 5588 and 5589 have required reporting for settlements exceeding $5,000 for approximately 26 years, since its inception in 1979. A corresponding law affecting licensed engineers has set the reporting threshold at $50,000. This law may come into effect in the summer of 2006. The American Institute of Architects, California Counsel (AIACC) has advised that they may support legislation to amend the code to a number that would be more realistic in today’s economy, such as the $50,000 figure. However, no such bill is currently before the Legislature, making the $5,000 limit secure for the time being.
While the reporting requirements have many negative aspects, there is one aspect that has been instrumental in helping to resolve claims for a nominal amount. During negotiations, an Architect’s attorney will remind opposing counsel that his client is required to report any settlement over $5,000. The position is to stand firm in that the Architect does not want to settle for over $5,000 because the Architect wants to avoid having to report to the CAB. In the authors’ personal experience, a great number of civil suits have been settled over the years for $4,999.99 to avoid the reporting requirements.
Is Change on the Way?
As of the writing of this article, the Legislature is reviewing AB 302. If adopted, AB 302 would revise sections 5588 and 5589. The CAB and AIACC sponsor the bill. According to AIACC, the changes to the reporting requirements are proposed in order to improve the clarity of its requirements and increase compliance.
The Bill provides that a licensee shall report to the CAB any civil action judgment, settlement, arbitration award, or administrative action resulting in a judgment, settlement, or arbitration award against the licensee in any action alleging fraud, deceit, negligence, incompetence, or recklessness by the licensee if the amount of value of the judgment, settlement, or arbitration award is $5,000 or greater. Additionally, the Bill specifies the information the report is required to contain. Finally, the Bill specifies that within 30 days of payment of all or any portion of any civil action judgment, settlement, or arbitration award in which the award is $5,000 or greater, any insurer or state or local government agency that self-insures the licensee shall report to the CAB.
Essentially, the bill is a response to the Attorney General Opinion. As argued by the sponsors, many types of settlements occur on a daily basis in the practice of architecture, and many times, an architect will be unsure when to report to the CAB. Because failure to report settlements subjects the architect to monetary fines, the sponsors feel a clearer understanding of when to file reports to the CAB is needed. With a clearer understanding, the sponsors feel architects will be more compliant with the law. This is a product of a multi-year negotiation between the AIACC and the CAB and is consistent with recent reporting requirements for other professions.
If approved, the Bill would help to clarify the reporting requirements by more specifically defining “settlements” and by outlining what the CAB expects to receive in the report. To follow the status of AB 302, visit the California Legislature’s website at info.sen.ca.gov.
Conclusion
Dealing with a duty to report, when to report, and how to report to the CAB has been a bit confusing. It is still unknown exactly what effect, if any, the reporting requirements will have on possible disciplinary procedures. You, as a licensed architect, must be aware of your obligations and that your insurance carrier will likely be reporting your settlements to the CAB. Make sure that all licensed architects at your firm are aware of the reporting requirements. Additionally, communicate with your insurance carrier to find out when, what and how they are reporting so as to not find yourself in the dangerous situation where the insurer has reported you and you have not self-reported.
You should always consider consulting with your attorney prior to any communications with the CAB. While reporting “settlements” to the CAB does not necessarily lead to negative consequences, it is always possible that an investigation can occur. If an investigation it started, there is great latitude regarding penalties that CAB can impose on the licensed architect.
Brian K. Stewart, Esq. is a partner with COLLINS, COLLINS, MUIR & STEWART, LLP with offices in South Pasadena and Newport Beach, California. The firm represents Design Professionals in all aspects of their professional practice including mediation, arbitration, trials, appellate work, general transactional work as well as contract review and negotiation. Mr. Stewart is currently a member of both the AIACC and CELSOC Legislative Advocacy Committees.
Note: This article is intended for a general discussion of the subject, and should not be mistaken for legal advice. Readers are cautioned to consult appropriate legal advisors for advice applicable to their individual circumstances.