BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Michael J. Machado, Chair
AB 1088 (Carter) Hearing Date: June 18, 2008
As Introduced: June 9, 2008
Fiscal: Yes
Urgency: No
VOTES: Prior votes not relevant
SUMMARY: Exempts from premium tax the risk portion of any
blended finite risk product used in the financing element of
state or federal Superfund environmental settlements, as
specified.
DIGEST
Existing law
1. Generally requires all insurers transacting insurance in
California to be admitted for that purpose, to meet financial,
deposit and reserve requirements, and to pay a gross premium tax
in lieu of all other taxes;
2. Allows a person to negotiate and effect insurance to protect
herself, himself, or itself against loss, damage or liability
with a non-admitted insurer, under terms specified in the
surplus line brokers law, as specified;
3. Specifies that only a specially licensed surplus line broker
can place insurance with a non-admitted carrier;
4. Requires a person who effects insurance with a non-admitted
carrier to collect and pay a 3 percent gross premium tax, as
specified;
5. Provides for certain exceptions to the limitations of the
surplus line broker law, including reinsurance of the liability
of an admitted insurer, insurance against the perils of
navigation; aircraft or spacecraft insurance, and insurance on
railroad property or operations in interstate commerce, but
AB 1088 (Carter), Page 2
except for reinsurance, still requires that insurance to be
placed through a surplus line broker.
This bill
1. Exempts from premium tax business done involving the risk
finance portion of any blended finite risk product used in
the financing element of state or federal Superfund
environmental settlements involving remediation of soil or
groundwater contamination.
2. Defines "blended finite risk product" as a contractual
arrangement combining risk finance with traditional risk
transfer, where a distinct portion of the program cost
represents the funding of a known, existing, nonfortuitous
future cost, obligation, responsibility, or liability at its
discounted net present value, and another portion of the
program cost represents risk transfer for losses which have
yet to occur related to the cost, obligation,
responsibility, or liability that is the subject of the
program;
3. Defines "risk financing" as a portion of any blended finite
risk product which represents the funding of a known,
existing, nonfortuitous future cost, obligation,
responsibility, or liability.
4. Defines "risk finance" or "financing element" as a method
of funding for a known future cost over a long time horizon
in current-value dollars using the principle of net present
value discounting.
5. Provides that this bill is a tax levy and shall go into
effect immediately.
COMMENTS
1. Purpose of the bill. To prevent the City of San Bernardino
(City) from having to pay gross premium tax on the investments
and insurance associated with an environmental clean-up
remediation consent decree.
2. Background . The City received a monetary settlement from the
Department of the Army in an environmental Superfund case
involving groundwater contamination at a former Army facility.
AB 1088 (Carter), Page 3
Under the consent decree, the City agreed to take responsibility
for what may be a 50 year remediation effort.
San Bernardino chose to invest the funds with American
International Group (AIG) to get a rate of return on the funds
over the 50-year term sufficient to meet its remediation
obligations. AIG is also acting as the liability insurer for a
part of the water system. According to information provided by
the author, apparently the insurance broker for both the AIG
investment contract and insurance policy failed to segregate the
accounting for the two products with AIG. The broker apparently
reported the entire amount of the AIG contracts-both investments
and insurance-to the Department of Insurance (DOI). As a result
of the broker's actions, the DOI assessed a premium tax on both
the liability insurance and investment contracts with AIG.
The City has now demanded indemnity and reimbursement from the
insurance broker, and is engaged in litigation. In addition,
the City has challenged the validity of the premium tax with the
DOI and before the State Board of Equalization.
Currently, the City is employing a financing strategy by
purchasing a blended finite risk product, which will then in
turn stretch the payment the City receives from the United
States Department of the Army for their Superfund cleanup site.
The blended finite risk product contains risk transfer,
insurance components as well as separate risk finance
components. While the insurance components are assessed a
premium tax, the non-insurance components of the blended finite
risk products should not. When faced with the tax issue, the
Department of Insurance (DOI) has assessed a premium tax to the
City for the entirety of their blended finite risk product,
including the financing elements.
This bill seeks to clarify that risk finance products are not
taxable as a premium tax in cases where Superfund settlements
are used to fund remediation efforts.
If AB 1088 does not proceed, the City believes it will not have
enough funds to complete the groundwater cleanup and other
mitigation efforts.
The DOI is currently reviewing AB 1088 to determine if the
language does indeed solve the premium tax issue for the City.
3. Support . According to the San Bernardino Municipal Water
AB 1088 (Carter), Page 4
Department, this bill will assist them in remedying an
unexpected and unforeseen problem that evolved out of their
settlement of an environmental Superfund case involving
groundwater contamination at a former US Army defense site (Camp
Ono) known as the "Newmark Groundwater Contamination Superfund
Site." Under the Consent Decree the Department and the City
agreed to take responsibility for what may be a 50-year
remediation effort.
Further, they state that AB 1088 is a result of an unexpected
and highly questionable "premium tax" levied by the DOI on the
lion's share of the environmental Superfund clean-up settlement
proceeds, evidently because those proceeds were placed in an
investment account with an insurer, AIG.
4. Opposition . None received.
5. Questions .
a. Is the premium tax exemption for the risk finance portion
crafted narrowly enough for Superfund environmental
settlements or is it too loose to allow other situations to
take advantage of the exemption and not pay premium tax?
b. Can this be used as a model for other cities who enter
into consent decrees for Superfund environmental cleanup?
Many cities throughout the state are engaged in litigation
with the federal government and private entities in regards
to groundwater contamination cleanup.
POSITIONS
Support
City of San Bernardino Municipal Water Department (sponsor)
City of San Bernardino
Oppose
None received
Consultant: Bethany Westfall and Erin Ryan (916) 651-4102