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
                                   **********