SENATE BILL REPORT

SHB 2609

BYHouse Committee on Revenue (originally sponsored by Representatives 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

Senate Committee on Financial Institutions & Insurance

Senate Hearing Date(s):February 20, 1990; February 22, 1990

Majority Report:  Do pass as amended.

      Signed by Senators von Reichbauer, Chairman; Johnson, Vice Chairman; McCaslin, McMullen, Matson, Moore, Rasmussen, Smitherman.

Senate Staff:Walt Corneille (786-7416)

                  February 23, 1990

AS REPORTED BY COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE, FEBRUARY 22, 1990

BACKGROUND:

In 1989 the Legislature provided for the creation of an independent state agency to provide discounted reinsurance for an insurance company or risk retention group to sell pollution insurance to owners and operators of underground petroleum storage tanks.  The program designed by the Pollution Liability Reinsurance Agency was to provide coverage up to $1 million per occurrence and $2 million in the annual aggregate for owners and operators of underground storage tanks.

The reinsurance program administrator was directed to report to the Legislature by January 1, 1990 on the estimated costs of implementing the reinsurance program.  The administrator was restricted from entering into any contracts binding the state to provide pollution liability insurance until authorized by the Legislature.

Reinsurance is insurance provided to an insurance company where the reinsurer agrees to cover a set portion of a loss.  The form of reinsurance selected by the Legislature for this program 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.  The state would provide pollution liability insurance to an insurance company that issues policies to owners of UST's and would pay claims exceeding the specified amount.

The Legislature 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.  Owners using modern management practices and with newer tanks or older tanks that have been inspected will be charged less for insurance.

The reinsurance program is funded by a tax of 1/2 percent on the first possession of petroleum products.  Collection of this tax must cease whenever the program trust 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.

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:

The name of the Washington Pollution Liability Reinsurance Program is changed to the Washington Pollution Liability Insurance Program and all reference to reinsurance is changed to insurance.  The prohibition against the administrator from taking action or entering into any contract to provide pollution liability insurance is stricken.

The intent of the Legislature is clarified so that the program is to be made available particularly to those owners and operators whose underground storage tanks meet a vital economic need within an affected community and must be made affordable and available within the tax revenue limits provided.

To ensure quality program and contract design and to help protect the state from unintended liability, the administrator must contract with an organization that has experience in managing and designing pollution liability insurance and reinsurance.  The administrator when entering into consulting contracts must utilize a competitive bidding process but is not required to select the lowest bid.

The restriction on the use of an "excess of loss" reinsurance program is eliminated so that the administrator may examine and choose other alternatives of providing reinsurance.  The insurance program is authorized to cover costs incurred by a tank owner in attempting to meet underwriting standards set by the program.  Before entering into a reinsurance contract, the administrator must provide the chairs of the Senate Ways and Means, Senate Financial Institutions and Insurance, House Revenue, and House Financial Institutions and Insurance Committees with an actuarial report describing the various reinsurance methods considered.

Loss reserves are defined to mean the amount traditionally set aside by commercial liability insurance insurers for costs and expenses related to claims that have already been made.  Loss reserves are defined not to include losses that have been incurred yet not reported to the insurer.  Surplus reserves are defined as the amount traditionally set aside by commercial property and casualty companies to provide protection from unexpected losses and to serve as a measure of an insurance company's net worth.  The administrator must establish the amount of loss and surplus reserves on a quarterly basis after consulting with the Insurance Commissioner and the chairs of the Senate Ways and Means, Senate Financial Institutions and Insurance, House Revenue, and House Financial Institutions and Insurance Committees.

The administrator must notify the Department of Revenue of the amount set for the reserves by the 15th day of each calendar quarter.  The requirement that the Department of Revenue determine the quarterly balance in the trust account is clarified so that the balance must be calculated on a cash basis after excluding loss and surplus reserves.

Appropriation:    none

Revenue:    yes

Fiscal Note:      available

SUMMARY OF PROPOSED SENATE AMENDMENTS:

The Department of Ecology (DOE) must be notified when the reinsurance contract has been entered into.  Within 30 days the DOE must notify all owners and operators of underground storage tanks (UST's) that financial responsibility must be established by October 26, 1990 and that insurance under the program is available.  Owners and operators must also be notified that they must by November 1, 1990, declare the method of financial responsibility they intend to seek and indicate whether they will seek insurance under the program.  The DOE is required to prohibit an owner or operator from obtaining a tank tag or receiving petroleum until financial responsibility has been established.

The requirement that the administrator consults with the chairs of the House Revenue, House Financial Institutions and Insurance, Senate Ways and Means, Senate Financial Institutions and Insurance Committees and the Insurance Commissioner to establish the loss and surplus reserves is changed.  The administrator must only report to these parties the loss and surplus reserves required for the quarter.

The requirement that the administrator consult with the chairs of the House and Senate fiscal committees and Financial Institutions and Insurance Committees before entering into a contract of reinsurance is changed.  The administrator is only required to provide a report that describes the reinsurance methods considered.

Senate Committee - Testified: FOR:  Paul C. Dennis, Dennis Petroleum, WOMA; Neil Dompier, John Dompier Oil Co.; Terry Husseman, Department of Ecology