II 

111TH CONGRESS 

1ST SESSION S. 1486 

To amend the Internal Revenue Code of 1986 to provide for the creation 

of disaster protection funds by property and casualty insurance companies for the payment of policyholders’ claims arising from future catastrophic events. 

IN THE SENATE OF THE UNITED STATES 

JULY 21, 2009 

Mr. NELSON of Florida (for himself and Mr. MARTINEZ) introduced the 

following bill; which was read twice and referred to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to provide 

for the creation of disaster protection funds by property 

and casualty insurance companies for the payment of 

policyholders’ claims arising from future catastrophic 

events. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Policyholder Disaster 

5 Protection Act of 2009’’. 

6 SEC. 2. FINDINGS. 

7 The Congress makes the following findings: 


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1 (1) Rising costs resulting from natural disasters 

2 are placing an increasing strain on the ability of 

3 property and casualty insurance companies to assure 

4 payment of homeowners’ claims and other insurance 

5 claims arising from major natural disasters now and 

6 in the future. 

7 (2) Present tax laws do not provide adequate 

8 incentives to assure that natural disaster insurance 

9 is provided or, where such insurance is provided, 

10 that funds are available for payment of insurance 

11 claims in the event of future catastrophic losses from 

12 major natural disasters, as present law requires an 

13 insurer wishing to accumulate surplus assets for this 

14 purpose to do so entirely from its after-tax retained 

15 earnings. 

16 (3) Revising the tax laws applicable to the prop17 erty and casualty insurance industry to permit care18 fully controlled accumulation of pretax dollars in 

19 separate reserve funds devoted solely to the payment 

20 of claims arising from future major natural disasters 

21 will provide incentives for property and casualty in22 surers to make natural disaster insurance available, 

23 will give greater protection to the Nation’s home24 owners, small businesses, and other insurance conVerDate Nov 24 2008 00:07 Jul 22, 2009 Jkt 079200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S1486.IS S1486

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1 sumers, and will help assure the future financial 

2 health of the Nation’s insurance system as a whole. 

3 (4) Implementing these changes will reduce the 

4 possibility that a significant portion of the private 

5 insurance system would fail in the wake of a major 

6 natural disaster and that governmental entities 

7 would be required to step in to provide relief at tax8 payer expense. 

9 SEC. 3. CREATION OF POLICYHOLDER DISASTER PROTEC10 TION FUNDS; CONTRIBUTIONS TO AND DIS11 TRIBUTIONS FROM FUNDS; OTHER RULES. 

12 (a) CONTRIBUTIONS TO POLICYHOLDER DISASTER

13 PROTECTION FUNDS.—Subsection (c) of section 832 of 

14 the Internal Revenue Code of 1986 (relating to the taxable 

15 income of insurance companies other than life insurance 

16 companies) is amended by striking ‘‘and’’ at the end of 

17 paragraph (12), by striking the period at the end of para18 graph (13) and inserting ‘‘; and’’, and by adding at the 

19 end the following new paragraph: 

20 ‘‘(14) the qualified contributions to a policy21 holder disaster protection fund during the taxable 

22 year.’’. 

23 (b) DISTRIBUTIONS FROM POLICYHOLDER DISASTER

24 PROTECTION FUNDS.—Paragraph (1) of section 832(b) of 

25 the Internal Revenue Code of 1986 is amended by striking 


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1 ‘‘and’’ at the end of subparagraph (D), by striking the 

2 period at the end of subparagraph (E) and inserting ‘‘, 

3 and’’, and by adding at the end the following new subpara4 graph: 

5 ‘‘(F) the amount of any distributions from 

6 a policyholder disaster protection fund during 

7 the taxable year, except that a distribution 

8 made to return to the qualified insurance com9 pany any contribution which is not a qualified 

10 contribution (as defined in subsection (h)) for a 

11 taxable year shall not be included in gross in12 come if such distribution is made prior to the 

13 filing of the tax return for such taxable year.’’. 

14 (c) DEFINITIONS AND OTHER RULES RELATING TO

15 POLICYHOLDER DISASTER PROTECTION FUNDS.—Section 

16 832 of the Internal Revenue Code of 1986 (relating to 

17 insurance company taxable income) is amended by adding 

18 at the end the following new subsection: 

19 ‘‘(h) DEFINITIONS AND OTHER RULES RELATING TO

20 POLICYHOLDER DISASTER PROTECTION FUNDS.—For 

21 purposes of this section— 

22 ‘‘(1) POLICYHOLDER DISASTER PROTECTION

23 FUND.—The term ‘policyholder disaster protection 

24 fund’ (hereafter in this subsection referred to as the 


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1 ‘fund’) means any custodial account, trust, or any 

2 other arrangement or account— 

3 ‘‘(A) which is established to hold assets 

4 that are set aside solely for the payment of 

5 qualified losses, and 

6 ‘‘(B) under the terms of which— 

7 ‘‘(i) the assets in the fund are re8 quired to be invested in a manner con9 sistent with the investment requirements 

10 applicable to the qualified insurance com11 pany under the laws of its jurisdiction of 

12 domicile, 

13 ‘‘(ii) the net income for the taxable 

14 year derived from the assets in the fund is 

15 required to be distributed no less fre16 quently than annually, 

17 ‘‘(iii) an excess balance drawdown 

18 amount is required to be distributed to the 

19 qualified insurance company no later than 

20 the close of the taxable year following the 

21 taxable year for which such amount is de22 termined, 

23 ‘‘(iv) a catastrophe drawdown amount 

24 may be distributed to the qualified insur25 ance company if distributed prior to the 


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1 close of the taxable year following the year 

2 for which such amount is determined, 

3 ‘‘(v) a State required drawdown 

4 amount may be distributed, and 

5 ‘‘(vi) no distributions from the fund 

6 are required or permitted other than the 

7 distributions described in clauses (ii) 

8 through (v) and the return to the qualified 

9 insurance company of contributions that 

10 are not qualified contributions. 

11 ‘‘(2) QUALIFIED INSURANCE COMPANY.—The 

12 term ‘qualified insurance company’ means any insur13 ance company subject to tax under section 831(a). 

14 ‘‘(3) QUALIFIED CONTRIBUTION.—The term 

15 ‘qualified contribution’ means a contribution to a 

16 fund for a taxable year to the extent that the 

17 amount of such contribution, when added to the pre18 vious contributions to the fund for such taxable 

19 year, does not exceed the excess of— 

20 ‘‘(A) the fund cap for the taxable year, 

21 over 

22 ‘‘(B) the fund balance determined as of the 

23 close of the preceding taxable year. 


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1 ‘‘(4) EXCESS BALANCE DRAWDOWN

2 AMOUNTS.—The term ‘excess balance drawdown 

3 amount’ means the excess (if any) of— 

4 ‘‘(A) the fund balance as of the close of 

5 the taxable year, over 

6 ‘‘(B) the fund cap for the following taxable 

7 year. 

8 ‘‘(5) CATASTROPHE DRAWDOWN AMOUNT.— 

9 ‘‘(A) IN GENERAL.—The term ‘catastrophe 

10 drawdown amount’ means an amount that does 

11 not exceed the lesser of the amount determined 

12 under subparagraph (B) or (C). 

13 ‘‘(B) NET LOSSES FROM QUALIFYING

14 EVENTS.—The amount determined under this 

15 subparagraph shall be equal to the qualified 

16 losses for the taxable year determined without 

17 regard to clause (ii) of paragraph (8)(A). 

18 ‘‘(C) GROSS LOSSES IN EXCESS OF

19 THRESHOLD.—The amount determined under 

20 this subparagraph shall be equal to the excess 

21 (if any) of— 

22 ‘‘(i) the qualified losses for the taxable 

23 year, over 

24 ‘‘(ii) the lesser of— 


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1 ‘‘(I) the fund cap for the taxable 

2 year (determined without regard to 

3 paragraph (9)(E)), or 

4 ‘‘(II) 30 percent of the qualified 

5 insurance company’s surplus as re6 gards policyholders as shown on the 

7 company’s annual statement for the 

8 calendar year preceding the taxable 

9 year. 

10 ‘‘(D) SPECIAL DRAWDOWN AMOUNT FOL11 LOWING A RECENT CATASTROPHE LOSS

12 YEAR.—If for any taxable year included in the 

13 reference period the qualified losses exceed the 

14 amount determined under subparagraph (C)(ii), 

15 the ‘catastrophe drawdown amount’ shall be an 

16 amount that does not exceed the lesser of the 

17 amount determined under subparagraph (B) or 

18 the amount determined under this subpara19 graph. The amount determined under this sub20 paragraph shall be an amount equal to the ex21 cess (if any) of— 

22 ‘‘(i) the qualified losses for the taxable 

23 year, over 

24 ‘‘(ii) the lesser of— 


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‘‘(I) 1 1 ⁄3 of the fund cap for the 

2 taxable year (determined without re3 gard to paragraph (9)(E)), or 

4 ‘‘(II) 10 percent of the qualified 

5 insurance company’s surplus as re6 gards policyholders as shown on the 

7 company’s annual statement for the 

8 calendar year preceding the taxable 

9 year. 

10 ‘‘(E) REFERENCE PERIOD.—For purposes 

11 of subparagraph (D), the reference period shall 

12 be determined under the following table: 

‘‘For a taxable year The reference period 

beginning in— shall be— 

2012 and later ........................... The 3 preceding taxable years. 

2011 ........................................... The 2 preceding taxable years. 

2010 ........................................... The preceding taxable year. 

2008 or before ........................... No reference period applies. 

13 ‘‘(6) STATE REQUIRED DRAWDOWN AMOUNT.— 

14 The term ‘State required drawdown amount’ means 

15 any amount that the department of insurance for 

16 the qualified insurance company’s jurisdiction of 

17 domicile requires to be distributed from the fund, to 

18 the extent such amount is not otherwise described in 

19 paragraph (4) or (5). 

20 ‘‘(7) FUND BALANCE.—The term ‘fund balance’ 

21 means— 


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1 ‘‘(A) the sum of all qualified contributions 

2 to the fund, 

3 ‘‘(B) less any net investment loss of the 

4 fund for any taxable year or years, and 

5 ‘‘(C) less the sum of all distributions under 

6 clauses (iii) through (v) of paragraph (1)(B). 

7 ‘‘(8) QUALIFIED LOSSES.— 

8 ‘‘(A) IN GENERAL.—The term ‘qualified 

9 losses’ means, with respect to a taxable year— 

10 ‘‘(i) the amount of losses and loss ad11 justment expenses incurred in the qualified 

12 lines of business specified in paragraph 

13 (9), net of reinsurance, as reported in the 

14 qualified insurance company’s annual 

15 statement for the taxable year, that are at16 tributable to one or more qualifying events 

17 (regardless of when such qualifying events 

18 occurred), 

19 ‘‘(ii) the amount by which such losses 

20 and loss adjustment expenses attributable 

21 to such qualifying events have been re22 duced for reinsurance received and recover23 able, plus 

24 ‘‘(iii) any nonrecoverable assessments, 

25 surcharges, or other liabilities that are 


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1 borne by the qualified insurance company 

2 and are attributable to such qualifying 

3 events. 

4 ‘‘(B) QUALIFYING EVENT.—For purposes 

5 of subparagraph (A), the term ‘qualifying event’ 

6 means any event that satisfies clauses (i) and 

7 (ii). 

8 ‘‘(i) EVENT.—An event satisfies this 

9 clause if the event is 1 or more of the fol10 lowing: 

11 ‘‘(I) Windstorm (hurricane, cy12 clone, or tornado). 

13 ‘‘(II) Earthquake (including any 

14 fire following). 

15 ‘‘(III) Winter catastrophe (snow, 

16 ice, or freezing). 

17 ‘‘(IV) Fire. 

18 ‘‘(V) Tsunami. 

19 ‘‘(VI) Flood. 

20 ‘‘(VII) Volcanic eruption. 

21 ‘‘(VIII) Hail. 

22 ‘‘(ii) CATASTROPHE DESIGNATION.— 

23 An event satisfies this clause if the event— 


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1 ‘‘(I) is designated a catastrophe 

2 by Property Claim Services or its suc3 cessor organization, 

4 ‘‘(II) is declared by the President 

5 to be an emergency or disaster, or 

6 ‘‘(III) is declared to be an emer7 gency or disaster in a similar declara8 tion by the chief executive official of a 

9 State, possession, or territory of the 

10 United States, or the District of Co11 lumbia. 

12 ‘‘(9) FUND CAP.— 

13 ‘‘(A) IN GENERAL.—The term ‘fund cap’ 

14 for a taxable year is the sum of the separate 

15 lines of business caps for each of the qualified 

16 lines of business specified in the table contained 

17 in subparagraph (C) (as modified under sub18 paragraphs (D) and (E)). 

19 ‘‘(B) SEPARATE LINES OF BUSINESS

20 CAP.—For purposes of subparagraph (A), the 

21 separate lines of business cap, with respect to 

22 a qualified line of business specified in the table 

23 contained in subparagraph (C), is the product 

24 of— 


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1 ‘‘(i) net written premiums reported in 

2 the annual statement for the calendar year 

3 preceding the taxable year in such line of 

4 business, multiplied by 

5 ‘‘(ii) the fund cap multiplier applica6 ble to such qualified line of business. 

7 ‘‘(C) QUALIFIED LINES OF BUSINESS AND

8 THEIR RESPECTIVE FUND CAP MULTIPLIERS.— 

9 For purposes of this paragraph, the qualified 

10 lines of business and fund cap multipliers speci11 fied in this subparagraph are those specified in 

12 the following table: 

‘‘Line of Business on Annual Fund Cap 

Statement Blank: Multiplier: 

Fire .................................................................................................... 0.25

Allied .................................................................................................. 1.25

Farmowners Multiple Peril ................................................................ 0.25

Homeowners Multiple Peril ............................................................... 0.75

Commercial Multi Peril (non-liability portion) .................................. 0.50

Earthquake ........................................................................................ 13.00

Inland Marine .................................................................................... 0.25. 

13 ‘‘(D) SUBSEQUENT MODIFICATIONS OF

14 THE ANNUAL STATEMENT BLANK.—If, with re15 spect to any taxable year beginning after the ef16 fective date of this subsection, the annual state17 ment blank required to be filed is amended to 

18 replace, combine, or otherwise modify any of 

19 the qualified lines of business specified in sub20 paragraph (C), then for such taxable year sub21 paragraph (C) shall be applied in a manner 


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1 such that the fund cap shall be the same 

2 amount as if such reporting modification had 

3 not been made. 

4 ‘‘(E) 20-YEAR PHASE-IN.—Notwith5 standing subparagraph (C), the fund cap for a 

6 taxable year shall be the amount determined 

7 under subparagraph (C), as adjusted pursuant 

8 to subparagraph (D) (if applicable), multiplied 

9 by the phase-in percentage indicated in the fol10 lowing table: 

‘‘Taxable year beginning in: 

Phase-in percentage 

to be applied 

to fund cap 

computed 

under subparagraphs 

(A) and (B) 

2009 ............................................................................ 5 percent

2010 ............................................................................ 10 percent

2011 ............................................................................ 15 percent

2012 ............................................................................ 20 percent

2013 ............................................................................ 25 percent

2014 ............................................................................ 30 percent

2015 ............................................................................ 35 percent

2016 ............................................................................ 40 percent

2017 ............................................................................ 45 percent

2018 ............................................................................ 50 percent

2019 ............................................................................ 55 percent

2020 ............................................................................ 60 percent

2021 ............................................................................ 65 percent

2022 ............................................................................ 70 percent

2023 ............................................................................ 75 percent

2024 ............................................................................ 80 percent

2025 ............................................................................ 85 percent

2026 ............................................................................ 90 percent

2027 ............................................................................ 95 percent

2028 and later ............................................................ 100 percent. 

11 ‘‘(10) TREATMENT OF INVESTMENT INCOME

12 AND GAIN OR LOSS.— 


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1 ‘‘(A) CONTRIBUTIONS IN KIND.—A trans2 fer of property other than money to a fund 

3 shall be treated as a sale or exchange of such 

4 property for an amount equal to its fair market 

5 value as of the date of transfer, and appro6 priate adjustment shall be made to the basis of 

7 such property. Section 267 shall apply to any 

8 loss realized upon such a transfer. 

9 ‘‘(B) DISTRIBUTIONS IN KIND.—A transfer 

10 of property other than money by a fund to the 

11 qualified insurance company shall not be treat12 ed as a sale or exchange or other disposition of 

13 such property. The basis of such property im14 mediately after such transfer shall be the great15 er of the basis of such property immediately be16 fore such transfer or the fair market value of 

17 such property on the date of such transfer. 

18 ‘‘(C) INCOME WITH RESPECT TO FUND AS19 SETS.—Items of income of the type described in 

20 paragraphs (1)(B), (1)(C), and (2) of sub21 section (b) that are derived from the assets held 

22 in a fund, as well as losses from the sale or 

23 other disposition of such assets, shall be consid24 ered items of income, gain, or loss of the quali25 fied insurance company. Notwithstanding paraVerDate Nov 24 2008 00:07 Jul 22, 2009 Jkt 079200 PO 00000 Frm 00015 Fmt 6652 Sfmt 6201 E:\BILLS\S1486.IS S1486

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1 graph (1)(F) of subsection (b), distributions of 

2 net income to the qualified insurance company 

3 pursuant to paragraph (1)(B)(ii) of this sub4 section shall not cause such income to be taken 

5 into account a second time. 

6 ‘‘(11) NET INCOME; NET INVESTMENT LOSS.— 

7 For purposes of paragraph (1)(B)(ii), the net in8 come derived from the assets in the fund for the tax9 able year shall be the items of income and gain for 

10 the taxable year, less the items of loss for the tax11 able year, derived from such assets, as described in 

12 paragraph (10)(C). For purposes of paragraph (7), 

13 there is a net investment loss for the taxable year 

14 to the extent that the items of loss described in the 

15 preceding sentence exceed the items of income and 

16 gain described in the preceding sentence. 

17 ‘‘(12) ANNUAL STATEMENT.—For purposes of 

18 this subsection, the term ‘annual statement’ shall 

19 have the meaning set forth in section 846(f)(3). 

20 ‘‘(13) EXCLUSION OF PREMIUMS AND LOSSES

21 ON CERTAIN PUERTO RICAN RISKS.—Notwith22 standing any other provision of this subsection, pre23 miums and losses with respect to risks covered by a 

24 catastrophe reserve established under the laws or 

25 regulations of the Commonwealth of Puerto Rico 


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1 shall not be taken into account under this subsection 

2 in determining the amount of the fund cap or the 

3 amount of qualified losses. 

4 ‘‘(14) REGULATIONS.—The Secretary shall pre5 scribe such regulations as may be necessary or ap6 propriate to carry out the purposes of this sub7 section, including regulations— 

8 ‘‘(A) which govern the application of this 

9 subsection to a qualified insurance company 

10 having a taxable year other than the calendar 

11 year or a taxable year less than 12 months, 

12 ‘‘(B) which govern a fund maintained by a 

13 qualified insurance company that ceases to be 

14 subject to this part, and 

15 ‘‘(C) which govern the application of para16 graph (9)(D).’’. 

17 (d) EFFECTIVE DATE.—The amendments made by 

18 this section shall apply to taxable years beginning after 

19 December 31, 2008. 

Æ 


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