BILL REPORT

HB 2609

BYRepresentatives Ferguson, Rust, Dellwo, Wang, P. King and McLean; by request of Pollution Liability Reinsurance Agency

Revising provisions for the Washington pollution liability insurance program.

House Committe on Revenue

Majority Report:  The substitute bill be substituted therefor and the substitute bill do pass.  (12)

      Signed by Representatives Wang, Chair; Pruitt, Vice Chair; Horn, Assistant Ranking Republican Member; Basich, Brumsickle, Fraser, Fuhrman, Grant, Haugen, Phillips, Rust and H. Sommers.

House Staff:Robin Appleford (786-7093) & John Coniff (786-7119).

AS REPORTED BY COMMITTEE ON REVENUE JANUARY 24, 1990

BACKGROUND:

The 1988 Legislature created the Joint Select Committee on Underground Storage Tanks to study and recommend legislation to assist owners and operators of underground storage tanks (UST) in complying with federal financial responsibility regulations. These regulations require owners and operators to demonstrate the ability to pay for "taking corrective action and compensating third parties for bodily injury and property damage caused by sudden and not sudden accidental releases from operating an underground storage tank."

During the 1988 interim, the joint committee found that many owners and operators, especially small owners and operators, would be unable to comply with the financial responsibility regulations without state assistance.  Although federal regulations provide alternatives for complying, the most practical method of compliance was through the purchase of costly liability insurance.  However, even if an owner can afford the insurance, the owner may not be able to obtain coverage because of the tank's age and type. Insurers typically reject owners of older tanks because of the high risk of leakage.

After reviewing several proposals to assist owners of UST's in complying with federal financial responsibility regulations, the joint committee recommended, and the Legislature adopted, legislation creating a state pollution liability reinsurance program.  The program is administered through an independent state agency.  The program administrator has broad authority to design and price reinsurance.  The Legislature created an advisory committee to the program that is appointed by the governor and consists of UST owners and operators and other professionals.

The state reinsurance program's objective is to improve the availability and affordability of pollution liability insurance for owners of UST's.  The objective is to be met by selling reinsurance at a price well below the private market price for similar reinsurance.  This discount will be passed on to owners and operators of UST's through reduced insurance premiums and increased availability of insurance.

Reinsurance is insurance provided to an insurance company.  The form of reinsurance selected by the Legislature is "excess of loss" reinsurance.  This form of reinsurance provides an insurance company with a policy in which the state agrees to reimburse a company for claim payments that exceed an agreed upon amount.  In other words, the state would sell a pollution liability insurance policy to an insurance company and would pay claims exceeding the insurance company's deductible.

As stated in the law creating the program, the Legislature chose the reinsurance program over competing alternatives to minimize state participation in investigating and settling pollution liability claims, to minimize state exposure to liability for pollution claims, and to encourage private insurance market growth so that the state can eventually discontinue the program.  In addition, the Legislature chose the reinsurance program as a less costly method of providing financial responsibility assistance.

The program cannot provide coverage in excess of $1 million per occurrence and $2 million annual aggregate.  No deductibles, coverage prices, reinsurance contract terms, underwriting standards, and coverage limitations were specified in the enabling legislation because these aspects of the program will be subject to negotiation with an insurer.  However, the Legislature did recognize that a viable insurance program cannot accept every owner and operator.  The Legislature therefore specified that it was not the intent of the program to 1) cover past or existing leaks, or 2) provide insurance without evaluating the condition of the tanks or the management practices of the owner.  Hence, owners and operators employing state of the art technology will be charged less than owners and operators who employ older, less effective methods to prevent pollution.

To fund the program, the Legislature imposed a petroleum products tax of 0.50 percent on the first possession of any petroleum product in the state.  The tax applies to the wholesale value of the petroleum product.  Petroleum products that are exported for use or sale outside of the state as fuel, and that are packaged for sale to ultimate consumers, are exempt from taxation.  Proceeds from the tax are deposited into the pollution liability reinsurance program trust account to fund the reinsurance program.

Collection of this tax must cease whenever the account balance exceeds $15 million and collection may resume when the balance drops below $7.5 million.  The Department of Revenue estimates that the account balance will reach $15 million by July of 1990.

Despite creation and funding of the reinsurance program, the 1989 Legislature prohibited expenditure of program funds until further review and approval of the program.  The Legislature authorized expenditure of $400,000 from the program trust account for initial program development.  The program administrator was to provide a report to the Legislature by January 1, 1990, analyzing the costs and effectiveness of the program in meeting the goal of providing financial responsibility assistance to owners and operators of UST's.

Standard practice in the insurance industry is for companies to set aside loss and surplus reserves.  "Loss reserve" is the amount traditionally set aside by commercial liability insurers to cover claims that have already been made. "Loss reserve" includes only known claims, and does not include claims that are merely projected. "Surplus reserve" is the amount traditionally set aside by commercial property and casualty insurance companies to provide financial protection from unexpected losses.

SUMMARY:

SUBSTITUTE BILL:  It is clarified that the intent of the program is to make the program available within existing tax revenues, particularly to owners and operators whose underground storage tanks meet a vital economic need within a community.  In adopting rules to implement the program, the administrator is to consider the economic impact to a community from losing a storage tank.

The administrator is to contract with an organization that has demonstrated experience in managing and designing pollution liability insurance and reinsurance.  The administrator is to enter into a contract after a competitive bid process, but is not required to select the lowest bid.  The administrator is given the flexibility to choose between "excess of loss" reinsurance and other alternatives, and may design a program to cover costs incurred by certain tank owners in meeting underwriting standards.  Before entering into a reinsurance contract, the administrator must provide the chairs of the Senate Ways and Means, Senate Financial Institutions, House Revenue, and House Financial Institutions and Insurance committees with an actuarial report describing the various reinsurance methods considered.

The administrator is to notify the Department of Revenue (DOR) each quarter of the amount of loss and surplus reserves required in the following quarter.  The administrator is to establish this amount after consulting with the insurance commissioner and the committee chairs.  Loss and surplus reserves are excluded from the balance calculated by DOR.  It is clarified that DOR is to calculate the balance on a cash basis.

The prohibition on expenditure of program funds is deleted so that the program can be fully implemented.  The name of the reinsurance program is changed from "Washington pollution liability reinsurance program" to "Washington pollution liability insurance program".

SUBSTITUTE BILL COMPARED TO ORIGINAL:  The change in the name of the program head from "administrator" to "director" is deleted. Various provisions regarding program design, contracting with insurers, consulting with committee chairs, and considering economic impacts are added. Language is added to exclude loss and surplus reserves from the determination of the cash balance.

Revenue:    The bill has a revenue impact.

Fiscal Note:      Available.

House Committee ‑ Testified For:    Gerard Fischer, Columbia Basin Hospital; Randy Ray, WOMA; Tim Hamilton, AUTO; Bruce Wishart, Sierra Club; and Jim Sims, Pollution Liability Reinsurance Program.

House Committee - Testified Against:      No one.

House Committee - Testimony For:    Current federal regulations require owners and operators of tanks to obtain insurance, but many tank owners can't afford the premiums.  By providing subsidized insurance coverage, the state will enable tank owners in rural and other areas to stay in business.  However, the program administrator should be given the flexibility to consider alternatives to the traditional reinsurance program.

House Committee - Testimony Against:      None.