ADMINISTRATION PROPOSAL FOR FINANCING
THE ENVIRONMENTAL INSURANCE RESOLUTION FUND

Overview

To finance the Environmental Insurance Resolution Fund (“the Fund"), the proposal
would generate revenue of $8.1 billion at a rate of $810 million per year for ten years, The
$8.1 billion would be raised through a combination of excise taxes and resolution user
charges assessed by the Fund. In theory, these taxes and user charges are comparable to
amounts that otherwise would have been paid by insurers in dealing with claims against them
under insurance policies written by the industry prior to 1986.

During the first four years of the Fund, approximately 70 percent of the Fund would
be financed prospectively using a retrospective computation basis (“retrospective taxes"),
calculated with respect to net premiums written by domestic and foreign insurers and
reinsurers for contracts providing certain U.S. commercial liability insurance during the
period from 1968 through 1985. Approximately 45 Percent would be generated by a
retrospective tax on net premiums written by direct writers and approximately 25 percent by
a retrospective tax on reinsurance premiums. Approximately 30 percent of the Fund would
be financed by a “prospective tax" on direct premiums from certain commercial insurance of
U.S. risks currently written by domestic and foreign insurers.

During years five through ten, 65 percent of the Fund’s revenues would be Taised by
the prospective tax on direct premiums from certain commercial insurance of U.S. risks
currently written by domestic and foreign insurers. The retrospective tax on reinsurance
Premiums would continue to generate approximately 25 percent of the Fund’s revenues.
Approximately 10 percent of the Fund’s revenues would be contributed to the Fund by
insurers that wrote insurance coverage giving rise to Superfund claims and for which the
Fund makes resolutions. These contributions would be resolution user charges based, using
a reasonable method, on the resolutions made by the Fund during previous years on behalf of
a specific insurer. For example, the resolution user charges could be based on the number
and/or dollar amount of resolutions made by the Fund or on the coverage limits of policies
submitted to the Fund by persons to whom the Fund make payments, Not more than $81
million per year for six years would be raised by these resolution user charges. The first
$81 million in the fifth year would be spread among all insurers for which claims were
resolved during the first four years of the Fund.

Under the proposal, no insurer or reinsurer would be allowed to recover under a
Teinsurance contract on the basis of any payment by the Fund or payment of taxes or
resolution user charges. .



To finance the Fund’s continuing obligations resulting from resolution requests
accepted within ten years after date of enactment, reauthorization of the Fund by the
Congress would be anticipated. A Treasury study would be conducted in the ninth year of
the Fund to make recommendations with respect to the Fund’s financing. No inference is
intended by the proposed allocation in any year, or combination of years, between
retrospective taxes and charges with regard to the structure of any tax or charge that the
Congress may find necessary to enact in the future.



Commissioners (NAIC). For reinsurance premiums that were not separately allocated and
reported on the NAIC annual statement by the line of business to which the underlying
coverage relates, the net written premiums for this unallocated reinsurance would be
determined by multiplying a reinsurance ratio of 21 percent by the unallocated reinsurance
premiums,

For insurers and reinsurers not filing NAIC annual statements, net written premiums
should be computed on a basis comparable to that required by the NAIC using reasonable
methods (as approved or provided by the Secretary) to approximate comparability where
necessary due to inadequate books and records. In addition for these insurers, if necessary a
proxy method for determining the allocation of premiums between insurance and Teinsurance
would be used unless an insurer has adequate books and records to determine the actual
insurance and reinsurance premiums. For premiums related to insurance covering risks only
partly with the U.S., only the portion of premiums attributable to risks within the U.S.
would be subject to the retrospective taxes.

Qualified commercial coverage means insurance coverage that was, or should have
been, categorized in the NAIC annual statement in the "commercial multiple peril* or "other
liability" lines of business. However, contracts included in the "other liability" line of
business that insured only certain types of coverage unrelated to commercial liability (and
thus could not generate exposure to environmental insurance claims) would be excluded. For
example, medical malpractice insurance would be an excluded coverage. However,
commercial property damage insurance, for example, could not be excluded from the
commercial multiple peril line of business.

In determining the adjusted base-period commercial premiums written from 1968
through 1985, the net premiums written for each year during the period would be adjusted by
an inflation factor. This adjustment would restate all premiums to 1985 dollars.

An exemption amount of $50 million could be deducted from the sum of the inflation-
adjusted premiums in determining the adjusted base-period commercial premiums.
Aggregation rules would apply so that related persons would be entitled to one $50 million
exemption amount. The $50 million exemption would not be available on a per-"Name" or
unincorporated-entity basis. Only one $50 million exemption would be allowed for all
Underwriters at Lloyd’s, London.

Foreign persons not otherwise subject to U.S. income tax would be subject to an
alternative “limits” tax equal to 0.5 percent of the maximum limit of liability on all types of
Property/casualty insurance contracts insuring or reinsuring U.S. risks. However, foreign
Persons could elect to be subject to the retrospective taxes instead of the limits tax and would
be required to enter into a closing agreement with the Treasury Department to ensure
collection of a proper amount of tax.

Foreign persons could preliminarily elect, pending execution of a closing agreement,

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The annual financing of the Fund would be as follows:

Years Retrospective Retrospective Prospective Reconciliation

Tax on Direct Tax on Tax Amounts
Insurance Reinsurance
1-4 $367 (per year) $200 $243 $-0-
5-10 $-0- (per year) $200 $529 $81

Tax rates would be determined that would generate this financing for the Fund.

The gross revenues from the prospective and retrospective taxes would be deposited
in a newly established trust fund in accordance with the Trust Fund Code of the Internal
Revenue Code. The Trust Fund would be administered by the Federal Agency represented
by the Fund’s chairperson. The Fund’s revenues would be managed in a manner similar to
that provided for present-law Code trust funds, including expenditure authority provisions
consisteft with the accompanying authorizing legislation, as effective on the date of the
Proposal’s enactment. The liability to the Federal Government would be limited to amounts
equal to gross revenues collected from the Fund's taxes and resolution user charges deposited
into the Trust Fund.

Insurers would be entitled to payments from the Fund as indemnification for certain
past settlements. These payments could not exceed $350 million during the Fund’s
existence,

Retrospective taxes

The retrospective taxes would be measured by reference to adjusted base-period
commercial premiums, generally defined as net premiums written for contracts or agreements
providing insurance or reinsurance with respect to qualified commercial coverage of U.S.
risks during the eighteen-year period beginning on January 1, 1968 and ending on December
31, 1985. The taxes would be imposed on both domestic and foreign persons. The rates of
Tetrospective tax would differ for net direct written premiums and reinsurance premiums
assumed from unrelated parties. Reinsurance premiums between incorporated, but not
unincorporated, insurers under common management would be considered to be between
related parties.

Net premiums written for qualified commercial insurance contracts means net
premiums written for contracts providing insurance of qualified commercial coverage of U.S.
situs risks (defined to include Puerto Rico and Possessions and territories) computed on the
basis of the annual statement approved by the National Association of Insurance

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Effective dates

The prospective and retrospective taxes and resolution user charges generally would
be effective on the date of the proposal’s enactment and would continue for ten years, unless
otherwise provided in the proposal. The prospective tax would apply to direct premiums
written after date of enactment. The retrospective taxes would be computed for each
calendar year, or part thereof, commencing with the first day of the month beginning after
date of enactment. The limits tax on foreign persons would be imposed for insurance
coverage periods beginning the first day of a month beginning after the date the Fund
becomes operational as described below. The resolution user charges would become payable
beginning in the fifth year of the Fund.

The authorizing legislation (H.R. 3800) accompanying this proposal Provides that the
Fund would not become operative unless at least 85 percent of the Parties potentially eligible
for awards accepted the Fund’s determination of the percentage recoveries for which they
potentially were eligible within 150 days of the bill’s enactment. To finance the operations
of the Fund during the contingency period, start-up filing fees of approximately $1 million
would be imposed on insurers by the Fund. These fees would not be creditable against any
Tetrospettive or prospective tax imposed under the Internal Revenue Code.

None of the taxes would be collected until it is determined that the Fund has adequate
participation ("the contingency period"). This could be for a Period up to 150 days after
enactment. The retrospective and prospective taxes would accrue during such contingency
Period but would not be payable during such period.

Within 30 days after the end of the month that includes the end of the contingency
period, if adequate participation is achieved, the retrospective and prospective taxes that
accrued during the contingency period would become due and payable by insurers.

Once the Fund becomes operational, the retrospective, prospective, and limits taxes
would be payable on a monthly basis. Estimated amounts could be paid for months in which
Premium data is not yet available for calculation of the prospective tax.

Although generally the prospective tax would apply to premiums written after date of
enactment but would not become payable by insurers until the contingency period ends, the
effective date for imposition of the Prospective tax for insurers not otherwise subject to U.S.
income tax would be delayed until the contingency period ends. These insurers would be
subject to the prospective tax for premiums written after the date the Fund becomes fully
operational and before the date that is the number of days in the contingency period beyond
the end of the tenth year after date of enactment.

If the Fund does not become operational, any remaining amounts in the Fund would
revert to the general revenues of the Treasury.



Joint Committee on Taxation
August 17, 1994
JCX-16-94

REVENUE-RELATED PROVISIONS OF H.R. 3800
(SUPERFUND REFORM ACT OF 1994)

Scheduled for Markup by the Committee on Ways and Means
on August 18, 1994”

I. LEGISLATIVE BACKGROUND

H.R. 3800 ("Superfund Reform Act of 1994"), the
Administration’s Superfund reauthorization proposal, was
introduced (by request) by Messrs. Swift, Dingell, Mineta,
Rostenkowski, and Applegate on February 3, 1994. Titles I-VIII
of the bill were referred jointly to the Committee on Energy and
Commerce and the Committee on Public Works and Transportation.
Title IX ("Taxes") was referred to the Committee on Ways and
Means.

: H.R. 3800 was ordered favorably reported, with an amendment,
by Energy and Commerce on May 18, 1994, and the report was filed
on June 30, 1994 (H. Rept. 103-582, Part I). Public Works and
Transportation marked up H.R. 3800 on July 28, 1994, and ordered
the bill favorably reported with amendments.

On May 20, 1994, the Administration separately submitted a
proposal for the imposition of two new insurance-related "fees"
(drafted to be excise taxes in the Internal Revenue Code --
hereinafter, referred to as excise taxes) on persons issuing or
bearing risks under certain commercial insurance policies. This
proposal subsequently was modified in a separate transmittal to
the Senate Committee on Environment and Public Works. The
Administration intended that these new excise taxes, as modified,
be incorporated in Title IX of H.R. 3800 as the financing source
for a new environmental insurance resolution program created by
the bill.

The Committee on Ways and Means held a public hearing on the
Superfund revenue proposals on July 25, 1994,!

' For a more complete description of the Administration

proposal, see Joint Committee on Taxation, "Revenue Related
Provisions of H.R.3800", July 22, 1994, JCX-9-94,



to be subject to the retrospective taxes in lieu of the limits tax immediately upon enactment
of the proposal. Under such an agreement, in place of Tequiring immediate payment and
withholding of the limits tax, the insurer or reinsurer would be Tequired to post adequate
security in a designated form with the Treasury for payment of the taxes. Ifa closing
agreement was not executed within a reasonable period of time, the Treasury would be
entitled to collect the full amount of limits tax, including the retention of any posted security.

Prospective tax

The prospective tax generally would be imposed on direct premiums written for
commercial insurance contracts and would apply in the same manner with Tespect to
commercial insurance contracts written by domestic and foreign insurers of U.S. risks.
Because this prospective tax is imposed on direct premiums written, it is not imposed on
reinsurance premiums nor is it imposed indirectly on reinsurance Premiums as the tax should
not be passed through by direct writers in the pricing of reinsurance arrangements.

For premiums related to insurance covering risks only partly within the U.S., the
entire ptemium would be subject to the prospective tax. To avoid such a result, a separate
contract could be written for the coverage of the U.S. risks.

The first $5 million of premiums written by an insurer would be exempted from the
Prospective tax. One $5 million exemption would be available to related persons. The $5
million exemption would not be available on a per-"Name" or unincorporated-entity basis.

Direct premiums written for commercial insurance contracts would mean gross
premiums written and other consideration for contracts providing insurance of commercial
coverage. Gross premiums written would be computed on the basis of the annual statement
approved by the NAIC or on an equivalent basis.

Commercial coverage would mean all commercial lines of insurance except the
workers compensation, medical malpractice, and accident and health lines of business,
Commercial lines would include premiums of the type that would be categorized in the NAIC
annual statement as fire, commercial multiple peril, other lability, product liability, allied
lines, multiple peril crop, inland marine, commercial auto no-fault, other commercial auto
liability, commercial auto physical damage, farmowners multiple peril, ocean marine,
financial guaranty, aircraft, fidelity, surety, glass, burglary and theft, boiler and machinery,
and others designated by the Secretary. From the premiums in these commercial lines,
premiums for directors and officers liability insurance, professional liability insurance, and
fire insurance on residential owner-occupied housing units (including condominiums and
cooperatives) should be excluded (with the insurer bearing the burden of proof with respect
to the type of insurance coverage).



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The EIRF would be funded by two new excise taxes and a
special assessment (imposed in the Internal Revenue Code). These
taxes and the special assessment are described in the attached
document prepared by the Department of the Treasury.



III. ADMINISTRATION PROPOSAL
1. Current Superfund Taxes and Trust Fund

The Administration proposal would extend the present-law
Superfund excise taxes through December 31, 2000, and the
corporate environmental income tax through taxable years
beginning before January 1, 2001. Conforming amendments would be
made to the present-law "dollar caps" to permit collection of
these taxes at projected levels during the five-year extension
period.

The Administration proposal does not include conforming
amendments to the Superfund Trust Fund expenditure authority
provisions to reflect proposed authorizing legislation. A
technical conforming amendment would update the expenditure
purposes of the Superfund Trust Fund to authorize expenditures
from the Trust Fund for the purposes provided under the
accompanying authorizing legislation (as that legislation becomes
effective on the date of enactment of the bill).

2. Environmental Insurance Resolution Fund and Excise Taxes

The Administration proposal would establish a new
Environmental Insurance Resolution Fund (the "EIRF") to resolve
private litigation about insurance coverage related to cleanup of
Superfund sites. The EIRF would process claims against private
insurance companies by parties that are potentially liable for
cleanup of these sites, and would pay monetary awards to the
parties. Upon acceptance of an award, insurance claims would be
extinguished. EIRF awards would equal statutory percentages
(determined generally by reference to the State in which the
sites giving rise to liability are located) of potential claims
against insurers.

Awards to parties potentially responsible for cleanup of
Superfund sites would cover all sites (past, present, and future)
with respect to which the party was found liable. Past
unreimbursed costs would be paid in 10 annual installments.
Present and future costs would be paid by the EIRF as the costs
were incurred.

The EIRF would be established as a new tax-exempt
organization, whose members would be appointed by the President.
As originally proposed by the Administration, the EIRF would
review and process awards for a five-year period, beginning on
the date of the bill’s enactment. (This five-year period was
extended to 10 years in H.R. 3800, as reported by the Committees
on Energy and Commerce and Public Works and Transportation.)



II. DESCRIPTION OF PRESENT LAW
1. Current Superfund Taxes and Trust Fund

Four different taxes are imposed under present law to fund
the Hazardous Substance Superfund (the "Superfund") program --

(1) A 9.7-cents-per-barrel excise tax on domestic or
imported crude oil or refined products;

(2) An excise tax on certain hazardous chemicals, imposed
at rates of from $0.22 to $4.87 per ton;

(3) An excise tax on imported substances for which one or
more of the hazardous chemicals subject to tax in (2), above have
been used as materials in their manufacture or production;? and

(4) A corporate environmental income tax equal to 0.12
percent of the amount of modified alternative minimum taxable
income in excess of $2 million.

Amounts equivalent to the revenues from these taxes are
dedicated to the Superfund Trust Fund, established in the Trust
Fund Code of the Internal Revenue Code. Amounts in the Superfund
Trust Fund are available for expenditure for the purposes
provided in present-law authorizing legislation, as that
legislation was enacted in 1986.

These Superfund taxes are scheduled to expire generally
after December 31, 1995. Present law provides for an earlier
expiration, however, if either of two "dollar caps" is exceeded:
(1) if the unobligated balance in the Superfund exceeds $3.5
billion on December 31, 1994, or (2) if the Treasury Department
estimates that more than $11.97 billion of revenues from these
taxes will be credited to the Superfund before January 1, 1996.

2. Environmental Insurance Resolution Fund and Excise Taxes
Present law does not include any provisions for Federal

resolution or funding of claims against insurers by parties
potentially responsible for Superfund site cleanup.

2? For a complete list of the chemicals and imported
substances subject to the taxes described in items (2) and (3),
see JCX-9-94,