I 
108TH CONGRESS 
2D SESSION 
H. R. 4186 
To amend the Internal Revenue Code of 1986 to provide for the creation 
of disaster protection funds by property and casualty insurance compa-
nies for the payment of policyholders’ claims arising from future cata-
strophic events. 
IN THE HOUSE OF REPRESENTATIVES 
APRIL 21, 2004 
Mr. FOLEY (for himself, Mr. MATSUI, Mr. MCINNIS, Mr. HERGER, Mr. 
ENGLISH, Mr. BOEHNER, and Mr. CHABOT) introduced the following bill; 
which was referred to the Committee on Ways and Means 
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. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Policyholder Disaster 
Protection Act of 2004’’. 
SEC. 2. FINDINGS. 
The Congress makes the following findings:
(1) Rising costs resulting from natural disasters 
are placing an increasing strain on the ability of 
property and casualty insurance companies to assure 
payment of homeowners’ claims and other insurance 
claims arising from major natural disasters now and 
in the future. 
(2) Present tax laws do not provide adequate 
incentives to assure that natural disaster insurance 
is provided or, where such insurance is provided, 
that funds are available for payment of insurance 
claims in the event of future catastrophic losses from 
major natural disasters, as present law requires an 
insurer wishing to accumulate surplus assets for this 
purpose to do so entirely from its after-tax retained 
earnings. 
(3) Revising the tax laws applicable to the prop-
erty and casualty insurance industry to permit care-
fully controlled accumulation of pretax dollars in 
separate reserve funds devoted solely to the payment 
of claims arising from future major natural disasters 
will provide incentives for property and casualty in-
surers to make natural disaster insurance available, 
will give greater protection to the Nation’s home-
owners, small businesses, and other insurance con-
sumers, and will help assure the future financial 
health of the Nation’s insurance system as a whole. 
(4) Implementing these changes will reduce the 
possibility that a significant portion of the private 
insurance system would fail in the wake of a major 
natural disaster and that governmental entities 
would be required to step in to provide relief at tax-
payer expense. 
SEC. 3. CREATION OF POLICYHOLDER DISASTER PROTEC-
TION FUNDS; CONTRIBUTIONS TO AND DIS-
TRIBUTIONS FROM FUNDS; OTHER RULES. 
(a) CONTRIBUTIONS TO POLICYHOLDER DISASTER 
PROTECTION FUNDS.—Subsection (c) of section 832 of 
the Internal Revenue Code of 1986 (relating to the taxable 
income of insurance companies other than life insurance 
companies) is amended by striking ‘‘and’’ at the end of 
paragraph (12), by striking the period at the end of para-
graph (13) and inserting ‘‘; and’’, and by adding at the 
end the following new paragraph: 
‘‘(14) the qualified contributions to a policy-
holder disaster protection fund during the taxable 
year.’’. 
(b) DISTRIBUTIONS FROM POLICYHOLDER DISASTER 
PROTECTION FUNDS.—Paragraph (1) of section 832(b) of 
such Code is amended by striking ‘‘and’’ at the end of
subparagraph (D), by striking the period at the end of 
subparagraph (E) and inserting ‘‘, and’’, and by adding 
at the end the following new subparagraph: 
‘‘(F) the amount of any distributions from 
a policyholder disaster protection fund during 
the taxable year, except that a distribution 
made to return to the qualified insurance com-
pany any contribution which is not a qualified 
contribution (as defined in subsection (h)) for a 
taxable year shall not be included in gross in-
come if such distribution is made prior to the 
filing of the tax return for such taxable year.’’. 
(c) DEFINITIONS AND OTHER RULES RELATING TO 
POLICYHOLDER DISASTER PROTECTION FUNDS.—Section 
832 of such Code (relating to insurance company taxable 
income) is amended by adding at the end the following 
new subsection: 
‘‘(h) DEFINITIONS AND OTHER RULES RELATING TO 
POLICYHOLDER DISASTER PROTECTION FUNDS.—For 
purposes of subsections (b)(1)(F) and (c)(14)— 
‘‘(1) POLICYHOLDER
DISASTER
PROTECTION 
FUND.—The term ‘policyholder disaster protection 
fund’ (hereafter in this subsection referred to as the 
‘fund’) means any custodial account, trust, or any 
other arrangement or account—
‘‘(A) which is established to hold assets 
that are set aside solely for the payment of 
qualified losses, and 
‘‘(B) under the terms of which— 
‘‘(i) the assets in the fund are re-
quired to be invested in a manner con-
sistent with the investment requirements 
applicable to the qualified insurance com-
pany under the laws of its jurisdiction of 
domicile, 
‘‘(ii) the net income for the taxable 
year derived from the assets in the fund is 
required to be distributed no less fre-
quently than annually, 
‘‘(iii) an excess balance drawdown 
amount is required to be distributed to the 
qualified insurance company no later than 
the close of the taxable year following the 
taxable year for which such amount is de-
termined, 
‘‘(iv) a catastrophe drawdown amount 
may be distributed to the qualified insur-
ance company if distributed prior to the 
close of the taxable year following the year 
for which such amount is determined,
‘‘(v) a State required drawdown 
amount may be distributed, and 
‘‘(vi) no distributions from the fund 
are required or permitted other than the 
distributions described in clauses (ii) 
through (v) and the return to the qualified 
insurance company of contributions that 
are not qualified contributions. 
‘‘(2) QUALIFIED
INSURANCE
COMPANY.—The 
term ‘qualified insurance company’ means any insur-
ance company subject to tax under section 831(a). 
‘‘(3) QUALIFIED
CONTRIBUTION.—The term 
‘qualified contribution’ means a contribution to a 
fund for a taxable year to the extent that the 
amount of such contribution, when added to the pre-
vious contributions to the fund for such taxable 
year, does not exceed the excess of— 
‘‘(A) the fund cap for the taxable year, 
over 
‘‘(B) the fund balance determined as of the 
close of the preceding taxable year. 
‘‘(4) 
EXCESS
BALANCE
DRAWDOWN 
AMOUNTS.—The term ‘excess balance drawdown 
amount’ means the excess (if any) of—
‘‘(A) the fund balance as of the close of 
the taxable year, over 
‘‘(B) the fund cap for the following taxable 
year. 
‘‘(5) CATASTROPHE DRAWDOWN AMOUNT.— 
‘‘(A) IN GENERAL.—The term ‘catastrophe 
drawdown amount’ means an amount that does 
not exceed the lesser of the amount determined 
under subparagraph (B) or (C). 
‘‘(B) NET
LOSSES
FROM
QUALIFYING 
EVENTS.—The amount determined under this 
subparagraph shall be equal to the qualified 
losses for the taxable year determined without 
regard to clause (ii) of paragraph (8)(A). 
‘‘(C) GROSS
LOSSES
IN
EXCESS
OF 
THRESHOLD.—The amount determined under 
this subparagraph shall be equal to the excess 
(if any) of— 
‘‘(i) the qualified losses for the taxable 
year, over 
‘‘(ii) the lesser of— 
‘‘(I) the fund cap for the taxable 
year (determined without regard to 
paragraph (9)(E)), or
‘‘(II) 30 percent of the qualified 
insurance company’s surplus as re-
gards policyholders as shown on the 
company’s annual statement for the 
calendar year preceding the taxable 
year. 
‘‘(D) SPECIAL DRAWDOWN AMOUNT FOL-
LOWING
A
RECENT
CATASTROPHE
LOSS 
YEAR.—If for any taxable year included in the 
reference period the qualified losses exceed the 
amount determined under subparagraph (C)(ii), 
the ‘catastrophe drawdown amount’ shall be an 
amount that does not exceed the lesser of the 
amount determined under subparagraph (B) or 
the amount determined under this subpara-
graph. The amount determined under this sub-
paragraph shall be an amount equal to the ex-
cess (if any) of— 
‘‘(i) the qualified losses for the taxable 
year, over 
‘‘(ii) the lesser of— 
‘‘(I) 1⁄3 of the fund cap for the 
taxable year (determined without re-
gard to paragraph (9)(E)), or
‘‘(II) 10 percent of the qualified 
insurance company’s surplus as re-
gards policyholders as shown on the 
company’s annual statement for the 
calendar year preceding the taxable 
year. 
‘‘(E) REFERENCE PERIOD.—For purposes 
of subparagraph (D), the reference period shall 
be determined under the following table: 
‘‘For a taxable year 
The reference period 
beginning in— 
shall be— 
2008 and later .......................
The 3 preceding taxable years. 
2007 .......................................
The 2 preceding taxable years. 
2006 .......................................
The preceding taxable year. 
2005 or before .......................
No reference period applies. 
‘‘(6) STATE REQUIRED DRAWDOWN AMOUNT.— 
The term ‘State required drawdown amount’ means 
any amount that the department of insurance for 
the qualified insurance company’s jurisdiction of 
domicile requires to be distributed from the fund, to 
the extent such amount is not otherwise described in 
paragraph (4) or (5). 
‘‘(7) FUND BALANCE.—The term ‘fund balance’ 
means— 
‘‘(A) the sum of all qualified contributions 
to the fund, 
‘‘(B) less any net investment loss of the 
fund for any taxable year or years, and
‘‘(C) less the sum of all distributions under 
clauses (iii) through (v) of paragraph (1)(B). 
‘‘(8) QUALIFIED LOSSES.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
losses’ means, with respect to a taxable year— 
‘‘(i) the amount of losses and loss ad-
justment expenses incurred in the qualified 
lines of business specified in paragraph 
(9), net of reinsurance, as reported in the 
qualified 
insurance 
company’s 
annual 
statement for the taxable year, that are at-
tributable to one or more qualifying events 
(regardless of when such qualifying events 
occurred), 
‘‘(ii) the amount by which such losses 
and loss adjustment expenses attributable 
to such qualifying events have been re-
duced for reinsurance received and recover-
able, plus 
‘‘(iii) any nonrecoverable assessments, 
surcharges, or other liabilities that are 
borne by the qualified insurance company 
and are attributable to such qualifying 
events.
‘‘(B) QUALIFYING EVENT.—For purposes 
of subparagraph (A), the term ‘qualifying event’ 
means any event that satisfies clauses (i) and 
(ii). 
‘‘(i) EVENT.—An event satisfies this 
clause if the event is 1 or more of the fol-
lowing: 
‘‘(I) Windstorm (hurricane, cy-
clone, or tornado). 
‘‘(II) Earthquake (including any 
fire following). 
‘‘(III) Winter catastrophe (snow, 
ice, or freezing). 
‘‘(IV) Fire. 
‘‘(V) Tsunami. 
‘‘(VI) Flood. 
‘‘(VII) Volcanic eruption. 
‘‘(VIII) Hail. 
‘‘(ii) CATASTROPHE
DESIGNATION.— 
An event satisfies this clause if the event— 
‘‘(I) is designated a catastrophe 
by Property Claim Services or its suc-
cessor organization, 
‘‘(II) is declared by the President 
to be an emergency or disaster, or
‘‘(III) is declared to be an emer-
gency or disaster in a similar declara-
tion by the chief executive official of a 
State, possession, or territory of the 
United States, or the District of Co-
lumbia. 
‘‘(9) FUND CAP.— 
‘‘(A) IN GENERAL.—The term ‘fund cap’ 
for a taxable year is the sum of the separate 
lines of business caps for each of the qualified 
lines of business specified in the table contained 
in subparagraph (C) (as modified under sub-
paragraphs (D) and (E)). 
‘‘(B) SEPARATE
LINES
OF
BUSINESS 
CAP.—For purposes of subparagraph (A), the 
separate lines of business cap, with respect to 
a qualified line of business specified in the table 
contained in subparagraph (C), is the product 
of— 
‘‘(i) net written premiums reported in 
the annual statement for the calendar year 
preceding the taxable year in such line of 
business, multiplied by 
‘‘(ii) the fund cap multiplier applica-
ble to such qualified line of business.
‘‘(C) QUALIFIED LINES OF BUSINESS AND 
THEIR RESPECTIVE FUND CAP MULTIPLIERS.— 
For purposes of this paragraph, the qualified 
lines of business and fund cap multipliers speci-
fied in this subparagraph are those specified in 
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. 
‘‘(D) SUBSEQUENT
MODIFICATIONS
OF 
THE ANNUAL STATEMENT BLANK.—If, with re-
spect to any taxable year beginning after the ef-
fective date of this subsection, the annual state-
ment blank required to be filed is amended to 
replace, combine, or otherwise modify any of 
the qualified lines of business specified in sub-
paragraph (C), then for such taxable year sub-
paragraph (C) shall be applied in a manner 
such that the fund cap shall be the same 
amount as if such reporting modification had 
not been made. 
‘‘(E) 
20-YEAR
PHASE-IN.—Notwith-
standing subparagraph (C), the fund cap for a 
taxable year shall be the amount determined
under subparagraph (C), as adjusted pursuant 
to subparagraph (D) (if applicable), multiplied 
by the phase-in percentage indicated in the fol-
lowing table: 
Phase-in percentage to be
‘‘Taxable year 
applied to fund cap computed 
beginning in: 
under subparagraphs (A) and (B): 
2005 ...................................................................
5 percent
2006 ...................................................................
10 percent
2007 ...................................................................
15 percent
2008 ...................................................................
20 percent
2009 ...................................................................
25 percent
2010 ...................................................................
30 percent
2011 ...................................................................
35 percent
2012 ...................................................................
40 percent
2013 ...................................................................
45 percent
2014 ...................................................................
50 percent
2015 ...................................................................
55 percent
2016 ...................................................................
60 percent
2017 ...................................................................
65 percent
2018 ...................................................................
70 percent
2019 ...................................................................
75 percent
2020 ...................................................................
80 percent
2021 ...................................................................
85 percent
2022 ...................................................................
90 percent
2023 ...................................................................
95 percent
2024 and later ................................................... 100 percent.
 
‘‘(10) TREATMENT
OF
INVESTMENT
INCOME 
AND GAIN OR LOSS.— 
‘‘(A) CONTRIBUTIONS IN KIND.—A trans-
fer of property other than money to a fund 
shall be treated as a sale or exchange of such 
property for an amount equal to its fair market 
value as of the date of transfer, and appro-
priate adjustment shall be made to the basis of 
such property. Section 267 shall apply to any 
loss realized upon such a transfer.
‘‘(B) DISTRIBUTIONS IN KIND.—A transfer 
of property other than money by a fund to the 
qualified insurance company shall not be treat-
ed as a sale or exchange or other disposition of 
such property. The basis of such property im-
mediately after such transfer shall be the great-
er of the basis of such property immediately be-
fore such transfer or the fair market value of 
such property on the date of such transfer. 
‘‘(C) INCOME WITH RESPECT TO FUND AS-
SETS.—Items of income of the type described in 
paragraphs (1)(B), (1)(C), and (2) of sub-
section (b) that are derived from the assets held 
in a fund, as well as losses from the sale or 
other disposition of such assets, shall be consid-
ered items of income, gain, or loss of the quali-
fied insurance company. Notwithstanding para-
graph (1)(F) of subsection (b), distributions of 
net income to the qualified insurance company 
pursuant to paragraph (1)(B)(ii) of this sub-
section shall not cause such income to be taken 
into account a second time. 
‘‘(11) NET INCOME; NET INVESTMENT LOSS.— 
For purposes of paragraph (1)(B)(ii), the net in-
come derived from the assets in the fund for the tax-
able year shall be the items of income and gain for 
the taxable year, less the items of loss for the tax-
able year, derived from such assets, as described in 
paragraph (10)(C). For purposes of paragraph (7), 
there is a net investment loss for the taxable year 
to the extent that the items of loss described in the 
preceding sentence exceed the items of income and 
gain described in the preceding sentence. 
‘‘(12) ANNUAL STATEMENT.—For purposes of 
this subsection, the term ‘annual statement’ shall 
have the meaning set forth in section 846(f)(3). 
‘‘(13) EXCLUSION OF PREMIUMS AND LOSSES 
ON
CERTAIN
PUERTO
RICAN
RISKS.—Notwith-
standing any other provision of this subsection, pre-
miums and losses with respect to risks covered by a 
catastrophe reserve established under the laws or 
regulations of the Commonwealth of Puerto Rico 
shall not be taken into account under this subsection 
in determining the amount of the fund cap or the 
amount of qualified losses. 
‘‘(14) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including regulations—
‘‘(A) which govern the application of this 
subsection to a qualified insurance company 
having a taxable year other than the calendar 
year or a taxable year less than 12 months, 
‘‘(B) which govern a fund maintained by a 
qualified insurance company that ceases to be 
subject to this part, and 
‘‘(C) which govern the application of para-
graph (9)(D).’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
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