SENATE COMMITTEE ON

BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT

Senator Steven Glazer, Chair

2019 - 2020 Regular

Bill No: SB 1271 Hearing Date: May 18, 2020

Author:	Morrell
Version:
Urgency:		Fiscal:
Consultant:	Elissa Silva

Subject: Private investigator Act: licensure: limited liability companies

SUMMARY:

Authorizes a licensed private investigator (PI) to continue to organize as a limited liability company (LLC) until January 1, 2024.

NOTE: Due to the COVID-19 Pandemic and the unprecedented nature of the 2020 Legislative Session, all Senate Policy Committees are working under a compressed timeline. This timeline does not allow this bill to be referred and heard by more than one committee as a typical timeline would allow. In order to fully vet the contents of this measure for the benefit of Senators and the public, this analysis includes information from the Senate Committee on Judiciary.

Existing law:

Licenses and regulates private investigators by BSIS within the Department of Consumer Affairs (DCA) under the Private Investigator Act (Act) and makes a violation of the Act a crime. (Business and Professions Code (BPC) § 7512 et seq.)
Authorizes the BSIS to license and regulate security guards, proprietary private security employers, proprietary private security officers, alarm companies, locksmiths, private patrol operators, and repossession companies and their employees. (BPC §§ 6980; 7500; 7574; 7580; 7590)
Authorizes BSIS to issue a private investigator license and allow licensees to operate as a LLC until January 1, 2021. (BPC §7512.3)
Requires, as a condition of the issuance, reinstatement, reactivation, or continued valid use of a private investigator license, a LLC to maintain a liability insurance for damages due to acts, errors, or omissions arising out of the private investigator services it provides in the following amounts:
(BPC § 7520.3(b))
1. Requires no less than $1 million in liability insurance for a licensee that has up to five managing members.
2. Requires an additional $100,000 in coverage for each additional managing member up to five million dollars ($5,000,000) in total insurance.
Requires a LLC applicant to submit information and documentation to the BSIS which demonstrates compliance with financial security requirements, and to submit a Certificate of Liability Insurance to BSIS, as specified.
(BPC § 7520.3(c-d))
Authorizes the BSIS to deny, suspend, or revoke a license of a private investigator if he or she determines that the licensee or his or her manager, if an individual, or if the licensee is a person other than an individual, that any of its officers, directors, partners, or its manager, has committed any illegal or unlawful acts or violations of law as specified. (BPC §§ 7561.1; 7561.3; 7561.4)
Prohibits, via the Beverly-Killea LLC Act, domestic and foreign LLCs from rendering professional services in California. (Corporations Code (CC) § 17701.04).
Provides that an LLC may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the BPC if the applicable provisions of the BPC authorize a LLC to hold that license, certificate, or registration. (CC § 17701.04(a))

This bill extends the sunset date for the BSIS to issue a license to a licensed private investigator organized as an LLC until January 1, 2024 and makes other minor technical and clarifying changes.

FISCAL EFFECT:

Unknown. This bill is keyed fiscal by Legislative Counsel.

COMMENTS:

Purpose. This bill is sponsored by the California Association of Licensed Investigators. According to the author, “The current law that authorizes licensed private investigators to be organized as limited liability companies [LLCs] sunsets on January 1, 2021, unless extended. In 2014, AB 1608 authorized private investigators to be organized as limited liability companies, and included a sunset date which has since been extended to January 1, 2021. Since enactment, approximately two dozen licensed private investigators have organized as LLCs and it is anticipated that dozens more would do so if the statutory authorization is extended.”
Background.

Licensed Private Investigators. PI licenses are company licenses, which can be held by a sole proprietor or by a corporation. If an individual intends to work as a licensed PI, they must pass a test to become a Qualified Manager, where they will then be the sole proprietor of their license. In all licensing scenarios—individual, partnership, corporation, or LLC—within the PI Act, a Qualified Manager is tied to a license.

Limited Liability Company (LLC). Formation and operation of LLCs in California was authorized in 1994 through the Beverly-Killea Limited Liability Company Act (SB 469, Chapter 1200, Statutes of 1994).

Current law (CORP § 17701.04(b)) prohibits an LLC from providing “professional services” unless it is expressly authorized to do so in the BPC. “Professional Services” is defined to mean any type of professional services that may be lawfully rendered only pursuant to a license, certification, as specified, (CORP) § 13401(a)). Concerns have been expressed with LLCs being formed for businesses offering professional services because of the potential for consumer harm without recourse, as an LLC’s liability is limited. As a result, in order for PI businesses to organize as LLCs, legislative authorization is necessary. Without this bill, the authority for the BSIS to issue a license to an LLC would sunset on January 1, 2019. This bill will extend that authority until January 1, 2025.

Since the early 2000s, there have been a number of bills passed by the Legislature, and chaptered into law, which have authorized a variety of professions to organize as LLCs and LLPs including, alarm companies, contractors, private investigators, engineers, land surveyors, and architects, among others. Historically, the authorizing or re-authorizing legislation has included a mechanism to ensure consume protection and recourse for consumer harm through liability insurance and sunset dates.

In addition to requiring liability insurance coverage, previous legislation has also required the authority of LLC license to be subject to a “sunset” date which is reflected in the history of numerous related bills. Sunset dates have been included in SB 904 (Wieckowski, Chapter 406, Statutes of 2018), which extended the authorization for the BSIS to issue an alarm company operator license to a limited liability company (LLC) until January 1, 2024;.SB 177 (Wieckowski, Chapter 140, Statutes of 2015) extended the authorization of the BSIS to issue an alarm company operator license to a LLC until January 1, 2019; SB 1077 (Price, Chapter 291, Statutes of 2012), authorized a licensed alarm company to be organized as a LLC until January 1, 2016; SB 559 (Morell, Chapter 569, Statutes of 2017); extended the BSIS’s authority to issue private investigator licenses to an LLC; AB 1608 (Olsen, Chapter 669, Statutes of 2014) authorized a licensed private investigator to be organized as a LLC until January 1, 2018, among others. In addition, sunsets have been required for those professional licensing entities organizing as LLPs, including architects, starting with AB 469 (Cardoza, Ch. 504, Statutes of 1998) and through AB 560 (Gorell, Chapter. 291, Statutes of 2011). SB 1008 (Padilla, Chapter 634, Statutes of 2010) authorized licensed engineers and land surveyors to organize and operate as LLPs, with a sunset provision included, in addition to specified insurance requirements. Many of the recent bills which have provided an extension of the authority for certain professions to be issued a license as an LLC have contained a three-year sunset extension.

In 2017, the Legislature passed SB 559 (Morell, Chapter 569, Statutes of 2017) which among other things extended the BSIS’s authorization to issue private investigator licenses to LLCs. As part of that bill, in order to provide an additional level of consumer protection, that bill required an LLC licensed as a private investigator to report any paid or pending claim against its liability insurance to BSIS, which must then post a notice of a claim on the DCA’s BreEZe License Verification Internet Web page. That bill contained a sunset date of January 1, 2021. This bill extends that sunset date by four years, until January 1, 2024.

Senate Judiciary Committee issues. This bill touches upon various issues within the jurisdiction of the Senate Judiciary Committee, including consumer protection and limited liability. The Senate Judiciary Committee has historically tended to favor policies that strike a balance between allowing professional licensed service providers to operate in a manner offering both tax and liability-limiting advantages while preserving, to an appropriate degree, the ability of a party injured by professional negligence to recover damages for that injury. In addition, the Senate Judiciary Committee has historically favored shorter sunset periods for professional licensed service providers operating in such a manner—typically a three-year period— in order to allow the regulating entity to collect information that can assist in the evaluation by the Legislature of the mandated insurance levels. SB 559 (Morrell, Ch. 569, Stats. 2017) extended the authority of a licensed private investigator to organize as a limited liability company until January 1, 2021, and made other various changes. The Senate Judiciary Committee proposed some amendments to SB 559 (Morrell, Ch. 569, Stats. 2017) and those provisions are not being altered by this bill.
Arguments in Support. The California Association of Licensed Investigators writes in support, “Since enactment of this legislation by Chapter 669 of 2014 [AB 1608, Olsen], and continuation of this authorization through the enactment of Chapter 569 of 2017 [SB 559, Morrell], approximately four dozen licensed private investigators have organized as LLCs and it is anticipated that dozens more would do so if the statutory authorization is extended. We are not aware of any problems or negative consumer impacts having been reported since this authorization was enacted into law.”
Technical Amendment. As currently drafted, this bill extends dates related to the implementation of fee changes for BSIS licensees. The sunset and enactment dates in BPC § 7570 do not pertain to the extension of the authorization of the BSIS to issue a license to an LLC. As such, the bill should be amended to strike BPC § 7570 from the provisions of this bill according to the following:

On page, 18, strike lines 23-39

On page 19, strike lines 1-39

On page 20 strike lines 1-31

SUPPORT AND OPPOSITION:

Support:

California Association of Licensed Investigators

Opposition:

None on file

-- END --

SB 1271: Private investigator Act: licensure: limited liability companies.

News Coverage: