BILL ANALYSIS Ó Bill No: AB 2376 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION Senator Lou Correa, Chair 2013-2014 Regular Session Staff Analysis AB 2376 Author: Weber As Amended: April 10, 2014 Hearing Date: June 10, 2014 Consultant: Paul Donahue SUBJECT State construction projects; Insurance deductibles DESCRIPTION Eliminates a contractor's $25,000 minimum deductible for an insurance policy issued under the Department of General Services' (DGS) master builders' risk insurance program, instead requiring the amount of the deductible under the policy to be outlined in the request for bids or proposals for a state contracting project. EXISTING LAW 1)Generally prohibits property belonging to the state from being insured against risk of damage or destruction by fire, with specified exceptions. 2)Authorizes the Director of General Services (DGS) to establish a master builders' risk insurance program for all state construction projects during construction. 3)Provides that master builders' risk insurance shall be procured utilizing insurance procurement procedures approved by the Director of General Services. 4)Requires a deductible from a contractor of at least $25,000 for a master policy issued under the DGS master builders' risk insurance program. AB 2376 (Weber) continued Page 2 BACKGROUND 1) Purpose of this bill . This bill is sponsored by DGS, and would delete the requirement that a contractor have a $25,000 deductible for an insurance policy issued under the DGS master builders' risk insurance program, thereby allowing DGS to implement the existing master builders' risk insurance program for lower-valued projects and making the state's contracting process more efficient. According to the author, although the DGS risk insurance program was authorized in 2005, the state has yet to utilize the Program due to budget constraints and a scarcity of new construction projects. Prior to the passage of this law, contractors were required to carry their own risk insurance for state projects. The $25,000 deductible amount was established based on the large portfolio of high dollar capital outlay projects previously in existence - the state has since experienced a substantial decrease in the higher valued projects. However, the need to establish a Program still exists with the lower valued projects; [r]equiring a $25,000 deductible on the lower valued projects poses a hardship on small business contractors. The author believes that AB 2376 will enact changes to better enable the program to be utilized in lower valued projects - including in projects where smaller contractors are unable to meet the current $25,000 builders risk insurance deductible threshold. 2) Implementation problems : Builders' risk insurance is a type of property insurance that protects building projects during construction from fire and other hazards. Unlike other types of property insurance, it only applies to projects under construction, and does not cover losses before a project starts or after a project is complete. Not all insurers provide builders' risk insurance, and policies may differ across insurers. The state currently transfers this risk to the contractor, and requires the contractor to furnish builders' risk insurance on state construction projects. When a state project goes out to bid, the bid AB 2376 (Weber) continued Page 3 solicitation requires a contractor to provide a level of insurance coverage up to the full value of the contract amount, and the cost of this insurance is then passed onto the state as part of the contractor's bid. Because each contractor is responsible for securing its own builders' risk insurance policy, the type of coverage a contractor secures may vary, and may not satisfy coverage requirements. For example, some policies may differ for purposes of determining when a project is complete (upon acceptance or upon occupancy by the owner), and some policies may make it more difficult to extend a policy when a project was delayed or to renew a policy after a project's hiatus. As a result, some contractors faced difficulty securing appropriate coverage, while the state faced potential gaps in coverage or the risk of inadequate coverage. In an attempt to address those problems, SB 548 (Morrow) in 2005 authorized DGS to establish a master builders' risk insurance program (program) for the state to procure builders' risk insurance for any state construction project, thereby authorizing DGS to negotiate the master policy for all projects under the program in order to ensure adequate, uniform insurance coverage. Under the program, DGS would select an insurance broker through its competitive bidding process, and propose a slate of projects to the insurer in order to determine the appropriate deductible levels for each project. Once those deductibles are approved, DGS could specify in its notice for bid or proposal the minimum deductible for which the contractor is responsible, while DGS would be responsible for the policy. In addition to ensuring state projects are uniformly and adequately covered, SB 548 was intended to allow the state to potentially reduce its insurance costs by obtaining more favorable terms and conditions for these policies than individual contractors, who would otherwise pass on their higher insurance costs to the state through their bids. DGS also asserts that implementing the program would reduce staff time and administrative oversight for this portion of the contracting process. When SB 548 was adopted, the state had a large portfolio of high dollar capital outlay AB 2376 (Weber) continued Page 4 projects, which justified the $25,000 minimum deductible for contractors. According to DGS, the dollar amount of a project that would require such a deductible would start at $50 million. In recent years, the state's portfolio of new construction projects, especially higher valued projects, has decreased significantly, and there were not enough projects that would warrant a $25,000 deductible. As a result, this program was never implemented. Based on the range of project values, DGS believes that eliminating a statutory minimum deductible amount would provide DGS with the flexibility it needs to implement the program and set the deductibles on a case by case basis, thereby allowing all projects, even smaller ones, to benefit from the efficiency and uniformity the program would achieve. 3) Statements in support : According to DGS, requiring a $25,000 deductible on the lower valued projects poses a hardship on small business contractors. The current $25,000 deductible amount was established based on the large portfolio of high dollar capital outlay projects previously in existence - the state has since experienced a substantial decrease in the higher valued projects. To address this issue, DGS proposes that we lower the deductible amount below $25,000. This would better enable the Program to be developed for lower valued projects including smaller contractors unable to meet the current $25,000 insurance deductible threshold while incentivizing them to further participate in the state project bidding process. PRIOR/RELATED LEGISLATION SB 548 (Morrow), Chapter 106, Statutes of 2005. Authorized DGS to establish a master builders' risk insurance program for all state construction projects during construction and required that program to provide that if a master policy is issued, that policy would require a deductible of at least $25,000 from the contractor. SUPPORT: Associated Builders and Contractors (ABC California) Department of General Services AB 2376 (Weber) continued Page 5 OPPOSE: None on file FISCAL COMMITTEE: Senate Appropriations Committee **********