In a published decision, the Fourth District Court of Appeals has denied compensation to a subcontractor for work performed on a public works project due to its workers compensation policy lapsing, even though it was retroactively reinstated due to carrier mistake.
To maintain a valid California Contractor’s License, a contractor must maintain a certificate of workers compensation insurance. Failure to maintain workers compensation results in an automatic suspension of the Contractor’s License and precludes the contractor’s ability to pursue claims for money owed for work performed.
A suspended contractor’s license can be retroactively reinstated if the licensee obtains and submits to the License Board a valid certificate of workers’ compensation insurance within 90 days of the certificate’s effective date. If the certificate is submitted to the License Board 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.” (Bus & Prof. Code §7125.2)
In American Building Innovation LP v. Balfour Beatty Construction, Case Nos. G062471/G062965 subcontractor American Building Innovation (“ABI”) filed suit against general contractor Balfour Beatty for unpaid framing and structural steel work that ABI had performed for Balfour Beatty on a local elementary school project. During the project work, ABI’s workers compensation policy was cancelled due to ABI’s refusal to pay outstanding insurance premiums stemming from a prior policy dispute. ABI refused to pay those premiums because it believed it was being overcharged. This belief turned out to be correct and ABI ultimately settled with the carrier. Based on this settlement, the cancelled policy was retroactively reinstated. The Contractor’s License Board thereafter retroactively reinstated ABI’s Contractor’s License.
Balfour Beatty cross-complained against ABI and raised ABI’s licensure lapse as an affirmative defense. After a bench trial on the licensure issue, the trial court ruled in favor of Balfour Beatty on the licensure defense and awarded Balfour Beatty $1.55 million in attorney’s fees as the prevailing party. ABI timely appealed.
The Appeals Court agreed with the trial court and affirmed the ruling in favor of Balfour Beatty. The Appeals Court concluded that ABI was not duly licensed at all times in the performance of their work because of the licensure lapse. ABI continued to work on the school project knowing that its license had lapsed due to the workers compensation issue. ABI took years (not 90 days) to fully resolve the licensure issue.
The Appeals Court further pointed out that once the workers compensation policy had lapsed, ABI had a duty to immediately obtain coverage elsewhere in order to maintain its license and avoid a suspension. It did not do so, choosing instead to fight the billing issue over a prolonged period.
The Court ultimately ruled that because ABI could not demonstrate that its lapse in workers compensation was due to “circumstances beyond its control” (as required under statute) the Contractor’s License Board lacked the power to reinstate ABI’s suspended license, retroactively and therefore ABI was not duly licensed at all times during the performance of its work. As such, Balfour Beatty’s affirmative defense on licensure was correct, resulting in judgment against ABI and in favor of Balfour Beatty.
The Court also found that because the ABI/Balfour Beatty subcontract agreement contained a prevailing party’s attorney’s fees provision, the trial court was correct in awarding Balfour Beatty $1.55 million in attorney’s fees as the prevailing party and affirmed that award.
So, what is the lesson from this somewhat harsh opinion? Contractors cannot let their workers compensation coverage lapse during the performance of work, even if it may seem justified. If a policy lapse is inevitable, the contractor must immediately make alternative arrangements for coverage in order to avoid licensure issues. Any workers compensation lapse can and will be used as a defense in litigation and may preclude a contractor from legally recovering money they are otherwise owed. Further, it could place the contractor in a position of having to pay legal fees.
Pursu Agency