California’s New Responsible Managing Employees Law Explained

Property insurance claimants are entitled to fair claim payments for the costs to restore their property to pre-loss condition, including the cost of appropriate contractor supervision of sub-contractors and other managerial duties.

Supervision costs are payable before being incurred as part of every insured’s right to an immediate actual cash value payment. The term “supervision” is not defined as “fight,” but that is essentially what it means when it comes to insurance claims. Carrier adjusters are trained to target and cut construction supervision costs in making their initial actual cash value payments. Supervision costs, like labor, are “whales” to a carrier adjuster because they can be one of the largest trade categories and easiest to attack prior to costs being incurred. Instead of debating over like kind and quality repairs, which can come down to using the right line item in Xactimate, supervision is about the necessity of contractor supervision of sub-contractor work, which can change from project to project without any industry-standard rule of thumb. The carrier can and will find a friendly contractor or building consultant to estimate the work without the supervision costs.

This carrier conduct is about more than reducing costs per claim. The carrier wants to reduce contractor profits to discourage them from taking insurance jobs, funneling the work back to a preferred who will surely submit change orders down the road, but by that time, the carrier-friendly vendor is controlling the entire reconstruction process.

Insurers often lack legitimate bases to dispute these claims. Supervision can often be estimated without the insured first incurring them out of pocket or obtaining a detailed estimate from a contractor prior to signing a construction contract. Software like Xactimate can provide a baseline for local hourly rates, which can be modified from consultation with contractors in the field. The hours needed are often a function of the job’s complexity. Insurance companies, often unable to fight pricing, therefore contend that the job is less complex and requires fewer hours. In other words, the sub-contractors are competent enough to figure out the job themselves with little to no oversight by the responsible contractor.

California recently enacted AB 830, which helps fight against this systemic bad faith. AB 830 both clarifies the amount of supervision a contractor must provide on a project and the definition of supervision. Existing law allows contractors to supervise a project through a “responsible managing employee,” which was previously defined as “an individual who is a bona fide employee of the applicant and is actively engaged in the classification of work for which that responsible managing employee is the qualifying person on behalf of the applicant.” AB830 changes the definition of “responsible managing employee” and defines “a bona fide employee of the applicant” to mean an employee who is permanently employed by the applicant, and “actively engaged” to mean working 32 hours per week, or 80% of the total hours per week that the applicant’s business is in operation, whichever is less. Thus, these are now requirements for supervision.

The law also clarified what constitutes supervision. Under prior law, supervision was merely referred to as the process of “exercising direct supervision and control of their employer’s or principal’s construction operations as necessary to secure full compliance with the Contractors’ State License Law and the rules and regulations of the Contractors’ State License Board.” Now, the law defines “supervision or control” for these purposes to mean direct supervision or control or monitoring and being available to assist others to whom direct supervision and control has been delegated, and “direct supervision or control” to mean supervising construction, managing construction activities by making technical and administrative decisions, checking jobs for proper workmanship, or supervision on construction job sites.

The new law is found in the amended Cal. Bus. & Prof. Code § 7068.1, which states:

(a) The person qualifying on behalf of an individual or firm under paragraph (1), (2), (3), or (4) of subdivision (b) of Section 7068 shall be responsible for exercising supervision and control of their employer’s or principal’s construction operations to secure compliance with this chapter and the rules and regulations of the board. This person shall not act in the capacity of the qualifying person for an additional individual or firm unless one of the following conditions exists:

(1) There is a common ownership of at least 20 percent of the equity of each individual or firm for which the person acts in a qualifying capacity.

(2) The additional firm is a subsidiary of or a joint venture with the first. “Subsidiary,” as used in this subdivision, means any firm at least 20 percent of the equity of which is owned by the other firm.

(3) With respect to a firm under paragraph (2), (3), or (4) of subdivision (b) of Section 7068, the majority of the partners, officers, or managers are the same.

(b) Notwithstanding paragraphs (1) to (3), inclusive, of subdivision (a), a qualifying individual may act as the qualifier for no more than three firms in any one-year period.

(c) The following definitions shall apply for purposes of this section:

(1) “Firm” means a partnership, a limited partnership, a corporation, a limited liability company, or any other combination or organization described in Section 7068.

(2) “Person” is limited to natural persons, notwithstanding the definition of “person” in Section 7025.

(3) “Supervision or control” means direct supervision or control or monitoring and being available to assist others to whom direct supervision and control has been delegated.

(4) “Direct supervision or control” means any of the following:

(A) Supervising construction.

(B) Managing construction activities by making technical and administrative decisions.

(C) Checking jobs for proper workmanship.

(D) Supervision on construction sites.

(d) The board shall require every applicant or licensee qualifying by the appearance of a qualifying individual to submit detailed information on the qualifying individual’s duties and responsibilities for supervision and control of the applicant’s construction operations, including, but not limited to, an employment duty statement prepared by the qualifier’s employer or principal. Failure of an applicant or licensee to provide information required by this subdivision constitutes a violation of this section.

(e) Violation of this section shall constitute a cause for disciplinary action and shall be punishable as a misdemeanor by imprisonment in a county jail not to exceed six months, by a fine of not less than three thousand dollars ($3,000), but not to exceed five thousand dollars ($5,000), or by both the fine and imprisonment.

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