BILL ANALYSIS �
AB 2376
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Date of Hearing: April 22, 2014
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Susan A. Bonilla, Chair
AB 2376 (Weber) - As Amended: April 10, 2014
SUBJECT : State construction projects: insurance.
SUMMARY : Eliminates a contractor's twenty five thousand dollar
($25,000) minimum deductible for an insurance policy issued
under the Department of General Services' (DGS) master builders'
risk insurance program and instead requires the insurance policy
to require a deductible as outlined in the request for bids or
proposals.
EXISTING LAW
1)Prohibits, except as expressly authorized by law or as
specifically authorized by the Director of DGS, property
belonging to the state from being insured against risk of
damage or destruction by fire, prohibits the policies of fire
insurance on any property belonging to the state from being
renewed, and provides that those prohibitions do not apply to
the State Compensation Insurance Fund or to property owned by
the fund. (Government Code (GC) Section 11007(a))
2)Authorizes the Director of General Services to establish a
master builders' risk insurance program for all state
construction projects during construction. (GC 11007(b))
3)Provides that master builders' risk insurance shall be
procured utilizing insurance procurement procedures approved
by the Director of General Services. (GC 11007(c))
4)Requires the master builders' risk insurance program to
provide that if a master policy is issued, that policy shall
require a deductible from the contractor of at least
twenty-five thousand dollars ($25,000). (GC 11007(d))
FISCAL EFFECT : Unknown
COMMENTS :
1)Purpose of this bill . This bill would delete the requirement
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that a contractor have a minimum twenty-five thousand dollar
($25,000) deductible for an insurance policy issued under
DGS's 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. This bill is
sponsored by DGS.
2)Author's statement . According to the author, "Although SB 548
(Morrow) (Chapter 106, Statutes of 2005) was passed 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 builders['] risk insurance for state projects.
Problems arose for the state when trying to ensure that
contractors provided: 1) the proper insurance coverage levels;
and 2) insurance coverage for the duration of the construction
project.
"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.
"This bill [deletes] the deductible amount?This would better
enable the Program to be developed for lower valued projects
including smaller contractors unable to meet the current
$25,000 builders risk insurance deductible threshold."
3)Problems with implementing the master builders' risk insurance
program . 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 to
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bid, the bid will require 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)
(Chapter 106, Statutes of 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 projects, which justified the twenty
five thousand dollar ($25,000) minimum deductible for
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contractors. According to DGS, the dollar amount of a project
that would require a twenty five thousand dollar ($25,000)
deductible would start at fifty million dollars ($50,000,000).
In 2007, an insurer broker was procured for the
implementation of the program. Unfortunately, this was at the
height of the economic downturn, and due to budget
constraints, the state's portfolio of new construction
projects, especially higher valued projects, decreased
significantly, and there were not enough projects that would
warrant a twenty five thousand dollar ($25,000) deductible.
As a result, this program was never implemented.
According to DGS, the need for this program still exists for
lower valued projects, and requiring a contractor to be
responsible for a twenty five thousand dollar ($25,000)
deductible on lower valued project not only makes it nearly
impossible to implement the program, but could also pose a
barrier to entry for small contractors. For example,
according to one list of state projects, values ranged from a
low of four hundred thousand dollars ($400,000) to a high of
over forty-nine million dollars ($49,000,000), but none of the
projects were worth over fifty million dollars ($50,000,000)
and only five of 27 projects were over ten million dollars
($10,000,000).
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.
4)Arguments 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
builders risk insurance deductible threshold while
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incentivizing them to further participate in the state project
bidding process."
"The state will save on every contract utilizing the proposed
Program due [to] the economy of scale outlined in the
purchasing arrangement. However, the greatest advantages of
the Program will result from the following factors:
Eliminating mid-contract loss of builders' risk
coverage on projects.
Ensuring uniform terms and conditions of the
insurance coverage.
Ensuring that the coverage is provided by
top-quality, financially secure carriers."
1)Previous 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.
REGISTERED SUPPORT / OPPOSITION :
Support
Department of General Services (sponsor)
Opposition
None on file.
Analysis Prepared by : Eunie Linden / B.,P. & C.P. / (916)
319-3301