BILL ANALYSIS �
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 2376|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
CONSENT
Bill No: AB 2376
Author: Weber (D)
Amended: 4/10/14 in Assembly
Vote: 21
SENATE GOVERNMENTAL ORGANIZATION COMMITTEE : 8-0, 6/10/14
AYES: Correa, Cannella, De Le�n, Galgiani, Hernandez, Padilla,
Torres, Vidak
NO VOTE RECORDED: Berryhill, Lieu, Vacancy
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 73-0, 5/8/14 (Consent) - See last page for vote
SUBJECT : State construction projects: insurance
SOURCE : Department of General Services
DIGEST : This bill eliminates a contractors $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 amount of the deductible under
the policy to be outlined in the request for bids or proposals
for a state contracting project.
ANALYSIS :
Existing law:
1. Prohibits property belonging to the state from being insured
CONTINUED
AB 2376
Page
2
against risk of damage or destruction by fire, with specified
exceptions.
2. Authorizes the Director of 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 DGS.
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.
This bill eliminates a contractor's $25,000 minimum deductible
for an insurance policy issued under DGS master builders' risk
insurance program, and instead requires the amount of the
deductible under the policy to be outlined in the request for
bids or proposals for a state contracting project.
Background
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 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
CONTINUED
AB 2376
Page
3
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 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 will 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 $25,000
minimum deductible for contractors. According to DGS, the
dollar amount of a project that requires such a deductible
starts 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 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 will provide
CONTINUED
AB 2376
Page
4
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.
Comments
According to the author's office, 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;
requiring a $25,000 deductible on the lower valued projects
poses a hardship on small business contractors.
The author's office believes that this bill enacts 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 6/24/14)
Department of General Services (source)
Associated Builders and Contractors
Department of Finance
ARGUMENTS IN SUPPORT : According to DGS, the bill's sponsor,
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,
CONTINUED
AB 2376
Page
5
DGS proposes lowering the deductible amount below $25,000. This
better enables 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.
ASSEMBLY FLOOR : 73-0, 5/8/14
AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Bigelow, Bloom,
Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian
Calderon, Campos, Chau, Ch�vez, Chesbro, Conway, Cooley,
Dababneh, Dahle, Daly, Dickinson, Donnelly, Fong, Fox,
Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon,
Grove, Hagman, Harkey, Roger Hern�ndez, Holden, Jones,
Jones-Sawyer, Levine, Linder, Logue, Lowenthal, Maienschein,
Medina, Melendez, Mullin, Muratsuchi, Nazarian, Nestande,
Olsen, Pan, Patterson, Perea, Quirk, Quirk-Silva, Rendon,
Ridley-Thomas, Rodriguez, Salas, Skinner, Stone, Ting,
Wagner, Waldron, Weber, Wieckowski, Wilk, Williams, Yamada,
John A. P�rez
NO VOTE RECORDED: Eggman, Gorell, Gray, Hall, Mansoor, V.
Manuel P�rez, Vacancy
MW:d 6/25/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
CONTINUED