BILL ANALYSIS �
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.
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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
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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
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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
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OPPOSE:
None on file
FISCAL COMMITTEE: Senate Appropriations Committee
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