Below is an overview of the changes to California Business and Professions Code Section 5588 and its effect on the reporting requirements, for architects, in the construction industry.
Section 5588 Prior to 2005 Legislative Changes
Section 5588 of the California Business and Professions Code sets forth the reporting requirements for many business professionals including architects. Since 1979, Section 5588 has required architects and their insurers to report to the California Architect Board (the Board) “any settlement or arbitration award in excess of five thousand dollars ($ 5,000) of a claim or action for damages caused by the license holder’s fraud, deceit, negligence, incompetency, or recklessness in practice.”1
The language of the code section left open for interpretation the question of what types of settlement claims must be reported to the Board. Thus, in 2004, the Attorney General of the State of California published an opinion stating that a reportable settlement includes “any agreement resolving all or part of a demand for money which is based upon an insured architect’s alleged wrongful conduct.”2 He then went on to conclude that the only qualifications placed on the term “claim” for purposes of Section 5588 is that “(1) the demand be premised on the license holder’s alleged ‘fraud, deceit, negligence, incompetency, or recklessness in practice,’ and (2) the value of the claim, as measured by the settlement amount or arbitration award, exceeds $5,000.”3
The Board’s Recommendation to Amend Section 5588
In response to the Attorney General’s opinion, the Board directed the Regulatory and Enforcement Committee (REC) to determine the standard for reportable events. On December 7, 2004 the REC met and the consensus was that the Board should use “formal action (i.e., actions associated with any civil action judgment, settlement, arbitration award, or administrative action) as the standard for reportable events”.4
In order to set forth the standard for reportable events, the REC recommended, and the Board approved, amending section 5588 to require that “only settlements precipitated by legal action or arbitration awards that exceed $5,000 and allege wrongful conduct (fraud, deceit, negligence, incompetence, or recklessness) with respect to the architectural services being provided must be reported to the Board.”5
Thus, in 2005 Section 5588 was amended to states that “A licensee shall report to the board in writing within 30 days of the date the licensee has knowledge of 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 in the practice of architecture if the amount or value of the judgment, settlement, or arbitration award is five thousand dollars ($5,000) or greater.”6
The Impact the Changes to Section 5588 has on Reporting Requirements
An enforcement analyst of the Board stated that “it is the policy of the California Architects Board to only require reporting of formal settlements. That is, settlements reached through court action, arbitration or administrative action. Settlements reached through informal compromise or through voluntary mediation are not reportable.” Furthermore, he concluded that this interpretation “follows from the intent expressed by the Board while considering its response to the 2004 AG opinion.”
Thus, whether a settlement is either formal or informal is one of the necessary factors to consider when determining whether the Board will require a settlement to be reported. Therefore, although the amendment to Section 5588 occurred in 2005, the distinction between reporting requirements for informal and formal settlements continues to remain relevant within the construction industry.