BILL ANALYSIS
AB 1088
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1088 (Carter)
As Amended June 9, 2008
Majority vote
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|ASSEMBLY: | |(May 24, 2007) |SENATE: |36-0 |(August 7, |
| | | | | |2008) |
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(vote not relevant)
Original Committee Reference: L. GOV.
SUMMARY : Clarifies that "risk finance" portions of "blended
finite risk" contracts used with respect to federal Superfund
clean-up settlements are not "premium" for purposes of the 3%
gross surplus lines premium tax.
The Senate amendments delete the Assembly version of this bill,
and instead:
1)Clarify that "risk finance" portions of "blended finite risk"
contracts used with respect to federal Superfund clean-up
settlements are not "premium" for purposes of the 3% gross
surplus lines premium tax.
2)Define "blended finite risk" product to be a contractual
arrangement combining finance risk with traditional risk
transfer (insurance) where a distinct portion of the contract
represents the funding of a known, existing, nonfortuitous
future cost or obligation, and the other portion represents a
risk transfer for what would traditionally be an insurance
arrangement.
EXISTING LAW:
1)Requires, generally, that insurance policies issued in
California be sold only by "admitted" (licensed) insurance
companies.
2)Authorizes non-admitted insurance companies (i.e., companies
that are not licensed in California) to issue policies when
the insurance that the policyholder needs is not available
from admitted insurers. This type of insurance is referred to
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as "surplus lines" insurance.
3)Specifies that only a specially licensed "surplus lines
broker" can arrange for the sale of surplus lines insurance.
4)Provides that surplus lines policies are subject to a 3% gross
premiums tax.
5)Fails to provide statutory guidance on the question of what
portion of a blended finite risk contract constitutes premium
for purposes of this tax rule.
AS PASSED BY THE ASSEMBLY, this bill addressed military base
closure redevelopment plans.
FISCAL EFFECT : Despite the Senate Appropriations Committee
analysis that suggested this bill "may" meet the suspense
criteria, the bill was not moved to the suspense file, largely
because the bill is clarifying existing law, and would not
reduce tax revenue. As a result, there should be no fiscal
effect from enactment of this bill.
COMMENTS:
1)According to the author, the City of San Bernardino (City)
Municipal Water Department currently uses a creative strategy
involving a "blended finite risk" contract with a nonadmitted
insurance company as an investment instrument to stretch the
payment it received from the Department of the Army for its
Superfund contaminated groundwater cleanup site over a number
of years. The contract also includes an insurance provision.
The portion of this contract that can be characterized as an
investment is distinctly different from a typical annuity or
liability insurance policy. Had the Water Department simply
placed the investment portion of the settlement funds it
received from the Department of the Army with a traditional
investment or money management firm, there would have been no
premium tax. However, because the nonadmitted insurer (AIG -
which has faced regulatory scrutiny in other states about a
number of its accounting practices) reported the entire
contract as premium, despite the express intentions to the
parties prior to entering into the contract, the City faces
potentially expensive litigation to recover wrongly collected
taxes as it asserts what has heretofore been the policy of the
state - that is, that risk finance arrangements are not
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insurance premiums.
2)The City's settlement with the federal government to designed
to fund contamination remediation in its groundwater supply.
Because the process of addressing the contamination will
involve many years, it is necessary that the funds be invested
in a safe, prudent investment. Thus, the City entered into a
non-standard contract with a non-admitted insurance company
under terms that best suited the City's long-term remediation
needs. The City did not expect that the unique contract it
entered into with the insurer constituted an insurance product
within the meaning of the surplus lines tax law, and thus was
surprised when the insurer reported the whole contract amount
to the Department of Insurance (DOI) as "premium."
Historically, neither the Board of Equalization nor DOI has
treated this sort of arrangement as 100% premium, although
each of these contracts, due to their uniqueness, gets
individual review. This bill also provides clarification that
it is the nature of the risk transfer, not whether or not the
various provisions are in one contract or two distinct
documents having the same effect that controls.
3)The intent of this bill is to provide statutory clarity to the
well-established regulatory rule, and to ensure that the
current dispute is resolved according to that well-established
rule.
4)Despite the completely new subject matter in this bill, the
issues were heard by the Assembly last year in AB 1051
(Carter). When AB 1051 was used for a different purpose, this
surplus lines tax issue required a new vehicle. AB 1051 more
broadly exempted Superfund-related contracts from the Surplus
Lines Law; this bill more specifically defines the type of
product used in Superfund-type situations that have not
historically been subject to the tax
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086
FN: 0006504